Steel Industry Starts May on Relatively Strong Footing (Part 10 of 12)
OCTG segment
As we discussed previously, crude oil prices recovered sharply from their lows in January. The energy industry (XOP) is among the major consumers of steel products that use tubular steel products—also known as “OCTG” (oil country tubular goods). The demand for tubular products declined as leading exploration companies like ConocoPhillips (COP) and Suncor Energy (SU) slashed their capital expenditure budgets.
Although crude oil prices traded above $50 per barrel for more than a month, companies might want to see some more sustained upside in crude oil prices before committing additional capital to the business.
OCTG imports decline
The previous chart shows the trend in US OCTG imports. As you can see, imports declined substantially in February and March. They hit historical highs in the previous months. However, OCTG imports in March were still higher on a YoY (year-over-year) basis. Apparently, OCTG demand this year is much lower compared to last year.
Higher inventories
In previous months, higher levels of OCTG imports, led by Korea (EWZ), resulted in higher levels of OCTG inventory. According to estimates, markets are flooded with nine to ten months of OCTG supply. This much higher than the long-term average OCTG inventory.
The tubular segment of companies like U.S. Steel and Nucor could remain under pressure for the rest of this year. However, AK Steel (AKS) has minimal exposure to OCTG products. AK Steel is a play on the US automobile industry, where it ships more than half of its produce.
So far, we’ve analyzed the US steel industry indicators. In the next part of this series, we’ll look at some of the Chinese steel industry indicators.
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