Must-know: Why it makes sense to hold on to steel companies (Part 5 of 6)
The impact of dumping
Dumping can be defined as the selling of products at less than their production costs. When done by a foreign trading partner, it puts the basic survival of the domestic industry at risk. The U.S. has seen its steel imports surge over the past few years. Today, it’s the largest global steel importer. It imports a quarter of its annual consumption. The rising consumption in the U.S., along with higher selling prices are the key reasons for this increase.
U.S. steel producers filed 40 anti-dumping and countervailing duty petitions in 2013 and the first two months of 2014. This was the largest volume of trade cases in steel since 2001. Steel manufacturers have been urging the government agencies to put an end to this menace by having anti-dumping duties levied on such imports.
The previous chart shows the increasing steel imports in the U.S. Taking action on complaints of domestic steelmakers, the Department of Commerce (or DOC) recently ruled in favor of U.S. steel makers and imposed anti-dumping duties on imports of tubular goods from nine nations. This is a step in the right direction and will help the steel industry to compete globally on an even platform.
With domestic capacity utilization below 80%, the steel industry can reap the benefits if their production levels increase. Steel is a capital intensive business where fixed costs are high. It operates at higher utilization rates which increases the profit margin for steel companies. Also, if capacity utilization rates increase, it reduces competition in the market. This is positive for steel prices and steel companies.
Steel companies like Arcelor Mittal (MT), United States Steel Corporation (X), Nucor Corporation (NUE), and Steel Dynamics (STLD) and the SPDR S&P Metals and Mining ETF (XME) should benefit from an expected decline in imported steel.
Browse this series on Market Realist: