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Mittal predicts US steel price ‘normalization’

Aug 01, 2018 | 04:57 PM | Chicago | Michael Cowden

Tags  ArcelorMittal, Aditya Mittal, earnings, second quarter, Nafta, steel prices, Section 232, hot-rolled coil index Seth Rosenfeld

Steel prices might be close to a peak in the United States, even though domestic demand should remain strong for the balance of the year, ArcelorMittal chief financial officer Aditya Mittal indicated.

Mittal’s response came after Jefferies analyst Seth Rosenfeld asked whether US customers might be suffering “sticker shock” as a result of high domestic steel prices, speaking during an earnings conference call on Wednesday August 1.

“At this point in time… in terms of the ground reality, apparent steel demand is good and we are able to pass on the price increases in our US business,” Mittal said.

American Metal Market's hot-rolled coil index - a key measure of spot flat-rolled steel prices in the US - stands at $45.46 per hundredweight, down 0.8% from a July peak of $45.85 per cwt but up 39.3% from $32.63 per cwt at the beginning of the year.

Although some sources have said prices will resume their upward march while mill lead times stretch into the fall, others have said prices are more likely to continue to drift downward should trade tensions between the US and its traditional allies and trading partners ease.

Mittal appeared to favor the latter argument.

“Clearly, on [the] medium term, there should be a normalization of [prices] as some supply is brought on in the US steel industry and there could be certain exemptions granted for Canada and Mexico,” he said. “I think that the normalization would reflect a more reasonable margin for the US steel industry reflecting their cost position.”

U.S. Steel is adding more supply to the domestic market as it fires up previously idled furnaces at its Granite City Works in southern Illinois. JSW Steel (USA) might also increase output at its recently acquired flat-rolled steel mill in Mingo Junction, Ohio. And over the long term, more tons will come from Big River Steel, which has announced plans to double output at its mini-mill in Osceola, Arkansas. 

Big gains in US steel prices have come in large part because of the Section 232 quotas and tariffs, 25% in the case of imported steel. The US unexpectedly implemented those tariffs against Canada and Mexico on June 1, spurring prices higher still.

But there has been speculation that the Trump administration could soften its stance versus its North American Free Trade Agreement partners. And that could affect the domestic market because Canada is the largest supplier of foreign hot-rolled coil to the United States.

It’s not clear, however, when the US might remove Section 232 measures against Canada.

And Mittal offered little insight into the 232 impact on his company’s Canadian operations when KeyBanc Capital Markets analyst Philip Gibbs asked how the US tariffs might be affecting ArcelorMittal Dofasco – a Hamilton, Ontario, flat-rolled mill that exports significant tonnage to automotive customers in the US.

“Dofasco is respecting our automotive contracts. I know I am not fully answering your question. But I think that is an appropriate remark for me to make, and to get into more detail is inappropriate,” Mittal said.

Market participants have told American Metal Market that Canadian mills are continuing to honor contract commitments but are in some cases reducing their exposure to the US spot market because of Section 232.

On automotive contracts and contract business in general, ArcelorMittal should benefit in 2019 if new deals are negotiated at the higher pricing levels, Mittal said.

The company only began to see the impact of Section 232 on pricing in the US spot market in the second quarter, and long lead times and contracts that lag spot price indices mean higher spot prices won’t flow through to the contract side until late 2018 or 2019, he explained.

Rosenfeld agreed. ArcelorMittal “should benefit from continued margin strength as contract lags play catch-up with robust spot conditions,” he wrote in a research note on Wednesday.

All told, ArcelorMittal’s North America operations recorded earnings before interest, taxes, depreciation and amortization (Ebitda) of $791 million in the second quarter of 2018, up 56.3% from Ebitda of $506 million the year-earlier period, while sales rose by 16.3% to $5.36 billion in the same comparison.


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