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What's next for the US Steel Industry

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The US steel market has gone through many changes over the past four years under the Trump administration and is poised to continue upon a transformational path under the Biden administration as well, with a goal to being as competitive as possible in both good and challenging times.

“Over the last several years we have seen a domestic steel industry that continues to invest, continues to evolve, continues to modernize itself and to electrify itself,” Philip Bell, president of the Steel Manufacturers Association, declared. This trend, said Tyler Kenyon, a metals and mining research analyst with Cowen & Co., has been aided by what he describes as several pro-industrial trade and economic policies that not only had a positive impact upon steel demand, pricing spreads and cash flows, but also spurred quite a lot of reinvestment.

Christopher Plummer, managing director of Metal Strategies Inc., said that not only resulted in a surge in investment announcements for new and expanded steelmaking facilities – particularly electric arc furnace (EAF) operations, but also increased merger and acquisition (M&A) activity. That activity has included several high-profile flat-rolled steel deals over the past year, including Cleveland-Cliffs Inc.’s acquisition of both AK Steel Corp. and most of the ArcelorMittal USA assets (except for ArcelorMittal and Nippon Steel’s AM/NS Calvert joint venture), and United States Steel Corp.’s acquisition of Big River Steel LLC. These developments have been seen as being part of continuing efforts by US steelmakers to further decrease cost and to increase efficiencies to enable them to be more competitive.

Amongst the moves that preceded them was a $600 million long products consolidation deal that closed in November 2018, with Commercial Metals Co. (CMC) acquiring several of Gerdau Long Steel North America’s rebar-producing assets, including its Jacksonville, Florida; Knoxville, Tennessee; Rancho Cucamonga, California; and Sayreville, New Jersey, plants.

Trade policy  support

These structural changes were not the only transformational factors that have affected the US steel market over recent years. It is widely believed that one of the biggest changes were those related to steel trade policies, which SMA’s Bell said have been a net positive for domestic steelmakers given their effect in reducing unfairly traded imports. Many industry observers mainly attribute this to the Section 232 tariffs, which were applied to both steel and aluminium imports starting in March 2018, although Bell said that other governmental policies, including strong trade law enforcement, the USMCA replacement of the North American Free Trade Agreement (Nafta), tax reform and greater regulatory certainty have had a positive impact.

John Anton, associate director of the pricing and purchasing service of IHS Markit, maintained that Section 232 was the most significant thing to happen to the US steel industry since 2003-04, when numerous steel mills went bankrupt. He said that it was due to that industry consolidation and less steel overproduction that from 2004 until the beginning of the Great Recession in 2008 that steel prices were very high.

Steel prices are extremely high now as well, with hot rolled coil (HRC) prices reaching a historical high of $1,160 per short ton in mid-January after bottoming out at just under $450 per ton late in July. Anton said that present high prices are owing to the exclusion of imports, largely due to the Section 232 tariffs, although also through traditional antidumping and countervailing duty trade cases.

The US steel market took a hit in 2020 from the Covid-19 pandemic. “But we would have been in a much worse situation if it wasn’t for the Section 232 tariffs,” Kevin Dempsey, president and chief executive officer of the American Iron and Steel Institute (AISI), said. “If we didn’t have those tariffs in place, we wouldn’t have just been dealing with depressed demand, but we would have also probably been facing a surge in imports.”

He pointed out that in 2017 imports accounted for almost 27% of the US steel market, but, largely because of Section 232, that import share fell to 19% in 2019 and even inched down further, to about an 18% share, last year. Partly because of that import decline, Dempsey said that before the pandemic, some previously idled steel mills were restarted at the same time as some companies invested in new capacity, enabling US raw steel production capacity to increase from the low- to mid-70s to slightly above 80% early in 2020.

“But even the Section 232 could not save things in 2020 because everything was crashing,” Anton said, maintaining that a narrative being floated by some people that this proved that the Section 232 was ineffective and needs to be changed is actually incorrect. “It is that the Section 232 along with everything else was overwhelmed by the Covid-19 pandemic,” he said.

While operating rates dropped quickly from mid-March to early May – even faster than they had from 2008 to 2009 – bottoming out at 51%, “They have been clawing back since then, reaching 76.7% by the week of January 16,” Dempsey pointed out.

At the same time, Bell called the USMCA, which is still in the early stages of being implemented - having just been finalized in July 2020 - a landmark trade agreement that should serve as a model for others, pointing to its rules of origin content requirements, which stipulate that automakers need to source 70% of the steel (or aluminium) that they use in their vehicles from within North America. He said that should increase domestic steel production and consumption in the US, Canada and Mexico.

There also was a lot of antidumping and countervailing duties put on steel over the last several years, Philip Gibbs, a senior equity analyst with KeyBanc Capital Markets, observed. “But that had to happen,” he said. “Particularly against China, which had been extremely predatory.” He, however, said he does not think that the Section 232 tariffs were as necessary, other than to perpetuate trade agreements with certain regions of the world. “That purpose was largely served,” he said, with a lot of the agreements now forthcoming either having a quota, free trade agreement or exclusion.

Future US policy

It is still not entirely certain what the future of Section 232 will be under the Biden administration. Kenyon said that he believes that it is likely that the tariffs will continue to be eased or whittled down, which he said would also have been the case had Trump been re-elected. “However, the timing of when the tariffs would be removed could be a little quicker under Biden,” he added.

On the other hand, Dempsey said that he does not believe that, at least initially, there will be any significant changes in trade policy and that the new administration will continue to have a strong emphasis upon trade enforcement.

“If Biden does anything, it won’t be abrupt,” Anton said, adding that while Section 232 could be reduced or removed, that won’t be a priority for his first 100 days.

Four US steel trade associations (AISI, SMA, the Committee on Pipe and Tube Imports and the American Institute of Steel Construction) and the United Steelworkers union, in a January 11 letter, urged that Section 232 tariffs and quotas be kept in place, stating that doing so “is essential to ensuring

the viability of the domestic steel industry in the face of this massive and growing excess steel capacity,” adding that removing them will only invite a new surge in imports.

There have already been some early indications that the Biden administration will take action to further support the domestic industry, including his January 25 executive order strengthening federal “Buy American” rules, which Dempsey said affirms Biden’s commitment to his “Build Back Better” campaign promise with the use of greater domestic content.

Industry restructuring

Kenyon said that it was a combination of moves to reaccelerate the EAF steelmaking market share, which, as of early 2021 had grown to about 70% of all US steel production, along with the hangover from the Section 232 tariffs and the inventory destocking cycle, which ensued from the second half of 2018 through 2019, that led to some of the higher cost steel producers beginning to re-evaluate their longer term strategies.

With even some integrated producers making moves that included operating some EAF operations and/or providing raw materials for existing EAFs, SMA’s Bell said, “We’ve seen a US steel industry that has turned challenges into opportunities,” both by being an essential industry that responded well to the Covid-19 pandemic, but also one that is moving to make their footprint more sustainable given that EAF steelmakers can make steel with up to 75% less carbon dioxide emissions than those produced with blast furnaces.

CMC’s purchase of several of Gerdau’s US rebar assets did have a big impact upon the structure of that sector, bringing CMC’s rebar production capacity close to Nucor Steel’s at about a 40% share of the market. However, KeyBanc’s Gibbs noted that Cleveland-Cliffs’ acquisition of virtually all of ArcelorMittal’s US assets was an even greater redefining consolidation of the industry. He said that deal, which closed December 9, not only made sense for both Cliffs and ArcelorMittal individually, but is likely to provide more discipline in the US steel market as a whole over the next couple of years.

While Cliffs had already acquired AK Steel in March, that was not enough in itself to substantially change the market dynamics - at least not in the way that they were affected by the company’s additional acquisition of the ArcelorMittal USA assets. With the two deals, Cliffs, which previously supplied iron ore and other steelmaking raw materials but had not produced steel itself, had become both the biggest integrated steel producer and the biggest domestic flat rolled steel producer through its Cleveland-Cliffs Steel unit. That industry consolidation has also reduced the number of US integrated steel producers to just two, down from three early last year and over a dozen in the mid-1990s.

While announcing its fourth-quarter results, Cliffs said that it plans to restart the second blast furnace at its Cleveland Works. Gibbs noted that will add about 1.5 million short tons per year of carbon sheet capacity before the company may rebalance that site’s production towards pig iron in 2022 to service the growing needs of EAF steelmakers.

US Steel’s January 15 acquisition of Big River Steel, a highly technologically advanced EAF steelmaker in which it had already acquired a 49.9% stake in October 2019, is viewed as being another game-changing consolidation move that not just expands the footprint of US Steel, which is the only other integrated steel producer in the US, but represents another step in that company’s diversification path.

“We are creating the first ‘Best of Both’ integrated and mini-mill steel company,” David Burritt, US Steel’s president and chief executive officer said in a statement, “Closing on this world-competitive green steel asset purchase under budget and ahead of schedule.”

He added, “This is not an either/or initiative where you compromise the competitive advantage of one versus the other. Instead, we are dedicated to encouraging and sharing the best attributes of both, to the benefit of our customers, and we fully expect to generate profitable growth quickly in 2021 and enable a more nimble, innovative and cost-effective company across the business cycle.”

Another reason that it made sense for US Steel to acquire Big River, Kenyon said, is because it has allowed the steelmaker to focus its asset base upon its more profitable operations – Big River, Mon Valley and Gary Works – in lieu of some other assets. In mid-2020, it indefinitely idled its Great Lakes plant, Kenyon noted, and analysts wonder whether its Granite City plant will continue as a long-term sustainable sheet-making asset or whether it might be repurposed to make pig iron.

“Given that the past year was such a big year for industry consolidation, I don’t know if we will repeat that immediately,” Dempsey said. “We will continue to have a very dynamic steel market so there will be further changes over time, but I can’t say how quickly that will come.”

New production capacity

Almost all of the recent US steel industry investment in new production capacity has been EAF-based, with plants due to come on-line over the next few years through 2023. SMA’s Bell says that there has been about $13 billion in investments that has either been announced, is nearing completion or is under way for new furnaces, new mills, process optimizations and equipment upgrades, including those aimed at enabling US steelmakers to increase the value-added products, including next-generation, advanced high-strength steels, in their product mix.

But with this adding about 9.3 million tons of capacity to the 20 million tpy steel sheet market, Anton said it could be very disruptive. While it will displace a lot of imports, it will still lead to a knife fight for market share,” he said, by 2022 pulling down US sheet prices, which are currently at record highs, to a level that, even with the Section 232 tariffs, will be below European prices. “Someone won’t survive before prices start recovering again in 2024,” he predicted.

Not all the new capacity, however, will be for sheet. For example, Nucor is building a 1.2 million ton plate mill in Brandenburg, Kentucky, which is expected to come on line in late 2022. Leon Topalian, the company’s president and chief executive officer, said it will be able to produce 97% of the plate products demanded in the US market, adding that the location of the mill will give Nucor a geographic advantage in serving the Midwest.

Nucor has also recently started up two 350,000 tpy rebar micro-mills – one in Sedalia, Missouri, and another in Frost Free, Florida, which are currently ramping up. It is also in the process of expanding its merchant bar production capacity in Kankakee, Illinois. CMC has also announced plans to build a new 500,000 tpy rebar and MBQ micro-mill in Mesa, Arizona, which is expected to come on line in 2023.

Anton said that while they do not move the US national market that much, these new micro-mills make sense, both because of their new technologies and because the steelmakers are putting them in locations that are currently underserved.

Continuing investment

US steel mills are likely to continue to invest in efficiency-enhancing capital expenditures to improve their cost competitiveness over the next few years, Kenyon said, adding that would have been the case no matter who had won the election.

Just what impact the Biden administration and the Democrat-controlled Congress will have upon the US steel market over the next few years remains uncertain, although Plummer said that the biggest impact is likely to be in energy, climate, automotive, taxes and trade policy.

For energy, Biden already signed executive orders to cancel the cross-border permit necessary to build the Keystone XL oil pipeline and to suspend the issuance of new oil and natural gas leasing and drilling permits on public lands and waters for 60 days.

Biden is also likely to seek to raise or add new environmental requirements, including potentially seeking to step back up the auto emissions standards that were rolled back under the Trump administration. “That is an area that the US steel industry wants to work closely with the Environmental Protection Agency to make sure that any environmental requirements take into account their impact upon our competitiveness,” Dempsey said, explaining that if it raises costs for domestic producers it would put them at a disadvantage compared with imports.

But the new US President is also expected to push to increase the building of wind, solar and other renewable energy infrastructure as well as for the infrastructure necessary to support greater demand for electric vehicles. “You need steel to do that,” Dempsey said.

There also seems to be increased optimism that a comprehensive long-term infrastructure spending plan – one not just focused on roads and bridges, but also water, energy and broadband infrastructure – could finally be passed. In fact, Bell said that Biden has signaled that, given that it is a cornerstone of his Build Back Better plan that, just behind the pandemic, infrastructure is one of the first things that his administration will address. “That is great for the US steel market because every $1 billion invested in infrastructure creates about 5 million tons of steel demand,” he said.

There are some concerns about what the Biden administration will do regarding new taxes and regulation. “If tax incentives are reduced, companies are less likely to build new facilities or to buy more capital equipment,” Gibbs said. Increased regulation could have the same disincentive impact.

“We would also like to see a balance, common sense approach on regulation that ensures that any new regulations do not impose unreasonable competitive impacts upon steel producers,” Dempsey said. “With that and continued strong trade enforcement, that sets the stage for continued growth in the US steel market,” he concluded.

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