Questions Regarding Capacity Utilization Rates

We have heard this question from a number of people within the steel industry. The AISI number can be quite deceiving to someone who does not actively watch this data and is not aware of what is involved in producing the weekly production and capacity utilization number.

When reviewing the AISI weekly data you need to be aware that they are collecting information from both long products (rebar, beams, SBQ, wire rod, etc.) as well as the flat rolled or sheet mills.  Total capacity for the 2nd Quarter 2016 is approximately 30.4 million tons vs. 30.7 million tons during the same period last year. This puts the annual capacity number (all products) at 121.6 million tons according to AISI.

As you can see by that number, it does not appear any adjustment has been made to account for capacity that has been taken off line at any point in time. Right now we have at least four blast furnaces down due to the weakness in the energy markets and the flood of inventories on the service center floors going into 4th Quarter 2015. The AK Steel and US Steel Granite City blast furnaces are all considered as “able to run” and therefore as such they are in the AISI available capacity numbers. SMU is actually a little confused as to why the 2Q 2016 number is almost the same as 2Q 2015 as we believe USS had their Fairfield furnace running last year and it was not taken out until late 3rd/early 4th Quarter 2015. Since the furnace has been permanently shut down that tonnage should have been reduced from the AISI number.

The next issue we have with the weekly number is it comes from at best 50 percent of the producing steel mills providing production information. So, the number provided is actually a best guess scenario based on whatever model the AISI is using.

The reality of the situation is that the sheet mills, the flat rolled mills, are running close to full capacity. During their earnings conference calls with analysts were heard utilization rates from 82 percent to 88 percent capacity (the highest being Steel Dynamics). Long product mills are probably producing in the low 60 percentage range.

SMU Note: The AISI also produces a monthly raw steel production and capacity utilization rate number. This is based on close to 75 percent of the mills providing data. When compared against the weekly numbers they do not add up. We consider the monthly number to be more accurate since it comes from a deeper pool of information.