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A challenging year for steel reviewed


The year 2020 has turned out to be a much more challenging one for the US steel market than many had expected, largely because of the Covid-19 pandemic and the impact that it had upon the US economy and therefore the major steel-consuming end-use markets.

John Tumazos, president and metals analyst with John Tumazos Very Independent Research, estimated that for the year as a whole US steel demand will have fallen by about 16.7%, which is a pretty notable decline.

“But what was somewhat surprising is that it hasn’t turned out to be as bad as it had been during the Great Recession in 2009,” John Anton, associate director of IHS Markit’s pricingband purchasing service, pointed out.

Amy Bennett, principal consultant with Fastmarkets MB Research, said that was partly because of “a very impressive supply side response,” particularly on the part of US integrated steel producers, who at least temporarily shuttered a number of blast furnaces in an effort to keep supply inline with the dramatic drop-off in demand.

As such, Philip Bell, president of the Steel Manufacturers Association (SMA) called 2020 a year in which the industry has seen resiliency, opportunity and challenges all at once, with US steelmakers stepping up to the plate as an essential industry, finding ways to safely and sustainably meet their customers’ requirements, and continuing to invest in their facilities so they are ready once the industry moves into recovery mode.

“The worst of the crisis was in the spring of this year and that has now passed,” a spokeswoman for the American Iron and Steel Institute (AISI) said, “But the recovery has been slow with all major end-use markets having been affected to some degree, impacting both flat and long products.”

Revising expectations
Anton said that he was originally expecting 2020 to be a very good year for the US steel market both from a demand and price perspective. “I was expecting it to be a very good demand year from almost every sector,” he said, and while he wasn’t expecting the same kind of explosively high prices as were seen in 2018, “I was expecting prices to be high enough for the mills to make a profit and to sell a lot of tons,” he added.

Tyler Kenyon, a metals and mining analyst for Cowen & Co., had similar expectations – singledigit steel demand growth driven in part by all the inventory destocking that took place last year: “I was also hopeful that we could see some improvement in energy demand after a tough year in 2019 and flattish if not a modest upside in automotive production and low single-digit growth in construction and broader industrial markets.”

“Actually, in the beginning of the year the market actually got off to even a stronger start than was expected, helped by stronger than expected US economic growth,” Bennett said. Philip Gibbs, equity research analyst for KeyBanc Capital Markets, agreed, noting that during the first quarter of the year there were a lot of steel-consuming markets that were at a cyclical high. “But market sentiment started to change early in March when fears of the Covid-19 pandemic started to unfold,” he said, noting that that at th t time companies started to cancel or push out orders and to basically buy at their minimums.

That decline in market sentiment is not surprising, given that once the pandemic really started to hit the US in mid-March that resulted in widespread business lockdowns. The AISI spokeswoman observed that it was the manufacturing sector, particularly the automotive industry, which underwent a 10-week closure of US auto production plants from mid-March through mid-May, that was really hit hard in the early phase of the Covid-19 crisis.

That could be seen with the Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI), a leading indicator of manufacturing activity, which plummeted to 41.5% in April, down from 50.9% in January, with any reading of under 50% indicating a contraction of the manufacturing economy.

Meanwhile, while the oil and gas industry, which was already in a weakened state heading into the year, was also hit hard by the pandemic, the construction industry, which accounts for about 45% of US steel demand, held up quite well, at least at the height of the pandemic, even though, as Cowen’s Kenyon observed, its activity was impeded in some geographies that put restrictions on construction projects in an effort to contain the virus spread.

Project delays, however, were limited by the fact that construction work occurs outside and has a greater ability for social distancing. KeyBanc’s Gibbs expected that US non-residential construction activity will only be down 5% or less in 2020 as projects that were started late last year or early this year continue to go forward. “We are, however, concerned about private non-residential spending for next year, given that non-residential construction starts are currently down 15-20% from their peak in February,” he said. The American Institute of Architects’ Architectural Billings Index, while up slightly month on month in September, remains in negative territory, as it has been since March.

Production responds
Given these dynamics, US steel mill capacity utilization plummeted to 51.1% as of the week ended May 2, after fluctuating between 81% and 83% in January and February, according to AISI data. This, Kenyon said, largely came from the reaction of domestic integrated steel producers, who, given that they tend to be at the higher end of the steel sheet production curve, at least temporarily idled about 15-20 million short tons of blast furnace production capacity. While US mini-mills ramped down their output, according to Kenyon they did not idle any of their furnaces. In fact, SMA’s Bell said that some electric arc furnaces (EAFs) actually continued to operate at 80-90% capacity utilization rates, even during the second quarter.

Fastmarkets’ Bennett said that it was very interesting that while US steel prices declined quite sharply, they did not decline by the same magnitude as they had in previous economic crises. “It was our initial expectation that US hot rolled coil (HRC) prices (which are seen as a benchmark for US steel prices) would fall below a $400 per ton threshold, but they didn’t,” she said, noting that, instead, in July they bottomed out at $461 per ton, in large part due to the supply response by the steelmakers, but also because of the impact of the higher scrap prices which occurred when auto plant lockdowns reduced prime scrap generation. (see panel box on scrap dynamics)

Another contributing factor, according to Anton, was the fact that US steel imports had dried up, which, he explained, was not only the result of trade action, but also because domestic prices were just barely higher than those for foreign steel and that, given the declines in demand, there was no need for more steel than could be supplied domestically. As a result, Tumazos estimated that US steel imports will fall by nearly 20% to about 22.5 million tons this year. That import decline, Gibbs noted, is similar to that in 2019, and is more in less in line with the decline in demand, so domestic producers have not been able to achieve much of a share gain in light of that decline.

The rebound
Once states and local governments started to ease their restrictions and US manufacturers started to ramp up their production, domestic steelmakers slowly began to bring some of their idled capacitybback online. In fact, Bell pointed out that, as of late October, US Steel, for example, had restarted six of the ten blast furnaces that the steelmaker had idled. There is, however, some speculation that some of the still-shuttered capacity could be closed permanently, especially with some US integrated producers recently undergoing merger and acquisition activity – and possible consolidation – as well as some shifts in business strategy.

In addition to the increased likelihood that, as part of its Best of Both strategy, it will eventually acquire the remaining 51.1% share in Big River Steel that it does not already own, this year Cleveland-Cliffs acquired AK Steel and is expected to close a deal to acquire most of ArcelorMittal USA’s assets – excluding the AM/NS Calvert 50-50 joint venture between ArcelorMittal and Nippon Steel.

Kenyon said that with US Steel signalling that it will be focusing its business strategy on three other operations, its Great Lakes and Granite City facilities could be shuttered or repurposed to produce pig iron. “Also, Cleveland-Cliffs might have some difficult decisions to make with the integration of its new ArcelorMittal USA assets,” he said.

There has also been some uncertainty about what the USeconomic market recovery would look like as it came out of the second-quarter pandemicrelated lockdowns. “Our initial thinking was that we would see a V-shaped recovery with economic growth outperforming the expectations in the early months of the year,” Bennett said. But as the pandemic and lockdowns dragged on a bit, we became less confident about what the outcome would be.”

Instead, she said, it turned out to be somewhat of a mixed bag, with some areas, particularly automotive, housing starts, appliances, HVAC systems and some other consumer goods recovering sharply, while others, particularly the energy sector, continued to be depressed.

A spokeswoman for Nucor Corp. maintained that economic conditions actually recovered more rapidly than the steelmaker had expected, resulting in a rebound for many of its steel products, including bars, beams and sheet.

This comes as ISM’s manufacturing PMI first turned positive at 52.6% and has remained expansionary every month since, rising to 59.3% – its highest reading since September 2018 – in October. Similarly, based on AISI data, US steel mill operating rates, while still below pre-pandemic levels, have been gradually increasing every week since mid-May, reaching 70.4% for the week ended October 31.

Prices rally
“The automotive sector in particular has really started to rip with the production of light vehicles moving back up to pre-pandemic levels by the end of October,” Gibbs said, noting that this has been very supportive of both steel demand and pricing. Kenyon pointed out that came at a time when steel inventories had got quite low on the heels of another round of destocking in August, amid fears of a slow recovery in underlying demand. Also, there were several unplanned mill outages, including a strike at NLMK’s Sharon, Pennsylvania, rerolling facility. All these factors together resulted in a somewhat stronger than expected price rally, with HRC jumping by over $250 per ton from its July lows to nearly $700 per ton at the end of October, coming as mill lead times had extended further out than they had in years, and for the first time in a long time there being talk of controlled order entry.

“We haven’t, however, seen the same kind of price momentum for either steel plate or long products,” Anton said, noting that is to be expected, given that they have remained more stable than HRC throughout the year. “They didn’t go down as much as HRC and haven’t surged as much either,” he said, explaining, “Given that, unlike automotive, construction activity isn’t back to pre-Covid levels, it makes sense that sheet has been doing better than rebar and other long products.”

Uncertainties prevail
While there are many yet unknowns that could have an impact, especially given the recent increase in US Covid-19 cases and a still largely uncertain political environment, Tumazos said that he is optimistic that next year will be a better year for the US steel market than 2020 has been, given that with the current rising price environment companies will be seeking to rebuild their inventories. Gibbs, however, is less optimistic, predicting that while 2021 will come in like a lion, itb could go out like a lamb. He explained that while steel prices will probably remain very strong early in the year, they could be impacted once the new steelmaking capacity announced by EAF steelmakers starts ramping up at the same time that automotive steel demand is unlikely to get much better that it is right now, and with the potential for a reduced number of construction projects being added to the pipeline.

By conservative estimates, at least 10-12 million tons of new steel production capacity – largely sheet, but also plate and long product capacity – will be starting to come online between late this year and 2023. According to Christopher Plummer, managing director of Metal Strategies Inc., that is just the projects that are under way or that have been formally announced, and that there is another 7,000 tons of probable or possible new capacity that could also come online.

“This shouldn’t, however, be looked at as just new capacity,” SMA’s Bell said, calling it a bit of an algebra equation as a certain amount of that capacity will also displace both imports and older, less-efficient capacity.

Kenyon said that he is doubtful that HRC prices, which are $80-$100 per ton above more normalized levels, will be able to hold through 2021 and into 2022, especially given expectations that the US steel market will remain in a transition phase, which is likely to result in volatile steel pricing over the next few years.

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