US steel industry reels from uncertainty

Just a year after booming profits and mill restarts in the US steel industry on the heels of President Donald Trump's imposition of steel tariffs, a prevailing wind of uncertainty has led to lower demand, prices and expected earnings for domestic steelmakers for the rest of 2019.

The fortunes of steelmakers in 2019 have reversed from the heady days of 2018, when Nucor and Steel Dynamics (SDI) had record profits and US Steel brought in more than $1.1bn, almost triple what it made in 2017. That was after the US levied tariffs of 25pc on steel imports, largely taking aim at China, and boosting US steel prices by more than 50pc through July last year from a year earlier.

By the end of 2018 US Steel had restarted two shuttered blast furnaces, Nucor and SDI were preparing to announce investments in new steel mills and hot-rolled coil (HRC) prices hovered in the mid-$700s/st, down from the peak of more than $900/st recorded in mid-2018, but higher than prices HRC sold for in most of 2017.

Now oversupply of US production, lagging demand and low prices are weighing on the profits of major US steelmakers, with Nucor, SDI and US Steel all saying that falling prices will squeeze their third quarter earnings compared to 2018. Pennsylvania-based US Steel said this week that it plans to keep two furnaces it shuttered in July closed for the rest of the year due to market conditions.

The news comes just weeks after many market participants from steel service centers meeting in Atlanta for a major industry event said near-term prices are expected to sag for the rest of the year.

Economic indicators show that the US economy is slowing, with the Institute for Supply Manufacturing (ISM) factory purchasing managers' activity index falling to 49.1 in August from 51.2 in July, showing a contraction in factory activity for the first time since 2016 as the escalating trade war with China is impacting US manufacturing. Growth in gross domestic product (GDP) is slowing, as is new hiring in the US. The Federal Reserve has cut its key lending rate twice in two months, its first cuts since 2008 as a form of "insurance" to maintain the US expansion in the face of global headwinds, mainly stemming from the trade war with China.

One of the key markers the market has been looking at is automobile sales, with many seeing lower sales compared to last year's 17.3mn vehicles. Sales have been slowing and were running at a 17mn unit annual pace in August.

Falling imports into the US as a result of the Section 232 tariff on steel have failed to prop up prices. For the first half of the year imports declined by 13pc to 14.2mn t compared to 16.2mn t in the first six months of 2018, according to the US Department of Commerce. The Trump administration imposed 25pc steel tariffs on imports from all countries except for Australia, Canada, and Mexico, while Argentina, Brazil, and South Korea negotiated nontariff import quotas.

Meanwhile, the global steel market has exhibited weakness, with India leading the decline in steel pricing due to a sluggish domestic market, in turn sending material from India into other markets and driving down prices globally.

Steel prices in the US have fallen since the beginning of 2019, with the Argus weekly domestic US HRC index down by 23pc to $566.25/st. The Metals Service Center Institute (MSCI) said on Tuesday that steel shipments declined for the 10th consecutive month in the US and for the 13th consecutive month in Canada. US service center steel shipments in August fell by 13pc from August 2018.

Major service center Ryerson's chief executive Ed Lehner said at the August meeting in Atlanta that he expects steel prices in 2019 to fall to $550/st, a figure that is 3pc lower than this week's Argus HRC weekly domestic index price.

Integrated steelmaker US Steel said Wednesday that it expects its flat-rolled product shipments to total 10.7mn st this year, down from a prior outlook of 11mn st.

Electric arc furnace (EAF) steelmaker Nucor said lower demand from automotive, agricultural products and power transmission markets will weigh on its steel mill segment's performance in the third quarter.

Indiana-based SDI said fewer shipments and lower average pricing in the third quarter will impact its steel sheet operations compared to the second quarter, outweighing the benefits from falling scrap prices, strong demand from the construction industry and steady demand from other sectors.