US steel capacity set to rise as prices drop

The big four US flat rolled steelmakers are set to increase output through the remainder of the year, even as many in the markethad expected tightening of supply to stem a decline in prices.

US steel prices have been under significant pressure for most of 2022, driven by weakening downstream demand, conservative service center buying and persistently high supply.

Growing signs of a recession, including two consecutive quarters of negative growth and weakening manufacturing and housing indicators, have kept many buyers on the sidelines, afraid of being saddled with overpriced steel inventories should the downturn intensify.

Because of that, market participants had been eyeing the earnings of steelmakers Cleveland-Cliffs, Nucor, Steel Dynamics (SDI) and US Steel for any signs that production would be curtailed to reduce the oversupply in the market and prop up prices.

Instead, the steelmakers signaled in their latest earnings reports that they are betting that demand will remain steady or increase, as they pointed to persistent backlogs. The companies will be ramping up at flat-rolled mills that had been running at sub-optimal levels and restartingother mills that had been down for maintenance, bringing on additional supply of an estimated 16,200 short tons/day, or an additional 1.45mn st/quarter, according to production rates listed by the companies.

In the second quarter the four companies produced, shipped or sold a combined 11.44mn st of flat-rolled steel products, according to their recent news releases.

Cleveland-Cliffs is targeting a full ramp by August of a blast furnace at its Cleveland, Ohio, mill to take advantage of growing automotive demand. That furnace has been down for maintenance since March, and the auto industry has been hampered by semiconductor chip shortages, which are expected to reduce output by between 358,000-758,000 vehicles in North America in 2022, according to estimates from AutoForecast Solutions.

Electric arc furnace steelmakers Nucor and SDI are ramping up production at an existing mill and new mill, respectively, after spending billions of dollars on both. The companies point to persistent customer backlogs and are targeting full run rates at their respective facilities.

Nucor executive vice president Rex Query noted in July that the Gallatin mill in Kentucky, which underwent an expansion, would ramp up in line with "what's going on in the marketplace."

SDI's Sinton, Texas, mill has recently run at a 75-80pc production rate but suffered multiple production and power supply issues in July that cut its production by 100,000-150,000st for 2022.

The US steel capacity utilization rate, which includes all steelmaking assets like flat, long products and others, was broadly above 80pc from May 2021 through June 2022. Steelmakers largely consider an 80pc utilization rate to be the optimal level for profitability.

The Argus US hot-rolled coil (HRC) Midwest ex-works assessment fell to $822/st on 2 August, its lowest level since December 2020, when steel prices were rising rapidly out of the Covid-19 pandemic-induced price bottom. That was caused by large swathes of the US steel and manufacturing industries shuttering at the beginning of the pandemic.

Prices are down by 48pc since the beginning of 2022, driven by persistent oversupply in the market after steelmakers overshot demand in the fourth quarter of 2021.

Service centers have been working their inventories down since then, afraid to be inventory-heavy as steel prices sometimes cleaved off $100/st or more in a week.

By Rye Druzin