‘Steelmageddon’ Looms

Price-Crushing Glut Seen Disrupting Metals Market

By Paul Scott Abbott

As Bank of America Merrill Lynch forecasts “Steelmageddon” with such certainty it apparently has trademarked the moniker, and with the doomsday view backed by other observers and indicators, a bumpy downhill road appears to be ahead for the steel industry.

In the face of unrestrained optimism expressed by the Trump administration, the March 14 report from Bank of America Merrill Lynch – prognosticating a price-crushing steel supply glut in the U.S. by 2022 – is one of the latest predictors of forthcoming upheaval for American steel and related sectors.

Already impacted by heavy U.S. tariffs on steel imports, the steel marketplace is anticipated to face further turmoil when ramped-up American production leads to plummeting prices within the next three years, according to the report.

The overcapacity concern that long has focused on China and its dumping of underpriced steel exports may well thus be shifting its source to U.S. soil.

US Mills to Suffer

“In the medium term, none of the U.S. steel mills look secure,” said report co-author Timna Tanners, who has covered the metals and mining business since 2002. “While we note blast furnace operators [will]likely lose share and shut capacity, all mills suffer from low prices when excess capacity hits the market, in our view.”

Tanners, who wrote the March report with fellow Bank of America Merrill Lynch, or BAML, analyst Wilfredo Ortiz, is New York-based managing director covering metals and mining in BAML’s Americas equity research arm.
U.S. steel production capacity is expected to rise by 20 percent by 2022, creating oversupply of steel commodities, according to the report, exacerbating price declines. Average price of the benchmark commodity of hot-rolled coil, which had reached a high mark of US$900 per short ton in mid-2018, was already down to as low as US$660 a ton in early 2019, with predictions of a drop to US$550 per ton by 2022, as U.S. mills continue to augment recently unshuttered capacity with expansions plus opening of new mini-mills by such industry leaders as Nucor and Steel Dynamics.

All this steelmaking capacity coming online may well time with an overall global economic slowdown with concomitant reduced demand for steel and products made from it, according to at least one longtime observer.
Veteran steel industry analyst Christopher Plummer – no relation to the award-winning actor – said one of the two factors most impacting the global steel marketplace is the significant slowing of economies and end-market activity all over the world, including the U.S., where appliance, automotive and industrial equipment sectors are already feeling the pinch. The second major factor, he said, are tariff-related effects.

“We’re dealing with an environment of heightened trade regulations, with the U.S. at the forefront, but the cause ultimately is China,” Plummer said, who has been following the global metals and mining marketplace for more than three decades, serving since 1998 as chief executive officer, managing director and chief steel, metals and mining industry consultant for West Chester, Pennsylvania-based Metal Strategies Inc.

“There’s nothing new there,” Plummer told Breakbulk, “except for the heightened trade tensions, which have hopefully reached a peak, but they may not have.

“We’ve clearly moved into a slower end market and general economic activity level around the world,” Plummer said. “The U.S. is a little bit of an exception, but, even here, we’re approaching a point within the next 12 to at-most 36 months before we see kind of a rolling recession. In steel, we already are seeing it in automotive, for example, and automotive is a classic early-cycle performer.”

Industry Impacted

Plummer said repercussions of hefty U.S. tariffs placed last year on imports of steel, aluminum and other goods are being particularly felt by heavy industry firms such as Caterpillar and Deere.

“We’re seeing the mixture of normal cyclical slowdown enhanced, unfortunately, in a negative way with the Section 232 tariffs on steel and aluminum,” Plummer said, citing billions of dollars of consequences reported by U.S. manufacturing giants including General Motors, Ford and Whirlpool, which rely on strong export volumes.
Meanwhile, China is expected to continue to account for more than half of all of the world’s steel production, even as total global output begins to see a bit less growth. China’s 2018 output was nearly nine times that of India, which last year passed Japan to become the world’s No. 2 steel producer, and almost 11 times the output of the No. 4 producer, the U.S.

Global crude steel production eclipsed 1.8 billion tons in 2018, up 4.6 percent over 2017, with China’s share increasing to 51.3 percent from 50.3 percent, but early 2019 numbers indicate a slowing of the upward trend, with worldwide output of 146.7 million tons in January of this year up just 1 percent on a year-over-year basis compared with January 2017.

Uncertainty Grows

As market uncertainty escalates, impacts may become more wide-spread.

“China has been really pushing its luck all over the world,” Plummer said, noting that 80 percent of China’s total economic activity – from metals to finished goods – remains within the Asia-Pacific region, including Japan, Korea and Southeast Asia, where global opportunities for shipping steel therefore remain the highest. “But even China’s peripheral stuff causes havoc all over the rest of the world, and they tend to shift their focus to the rest of the world when their home markets are not doing well.”

With 60 percent of China’s steel production going into construction, rebar is viewed as the best indicator of Chinese prices, he said, and last year Chinese rebar prices climbed almost as high as U.S. prices, which traditionally are the highest in the world. That compares with three to four years earlier, when the Chinese price of rebar was about US$300 less per ton than in the U.S.

“The price of rebar and the spread – the premium of U.S. prices versus China – is starting to widen again, and that’s not good,” Plummer said. “And then you’ve got this whole black box of these trade cases, both Section 232 and individual product cases filed by companies all over the world, playing havoc with trade flows. It has come to a boil over the past six to 12 months.

“This is causing a lot of uncertainty,” he continued. “Trade flows are becoming restricted, and then you’ve got the secondary impact, with the people using steel and aluminum starting to really feel pain from their lack of competitive performance in selling their products. They’re paying much higher prices than their competitors. With trade barriers going up against the U.S. in retaliation, that’s far more important than the health of the U.S. steel or aluminum industry.”

Therefore, with heavy industry manufacturers employing as many as 10 times the number of people as directly work in steel industry, the ripple effects are great.

“Because they’re value-added, there’s much more of an impact on the economy when they start to slow down, and that’s, in fact, what we’re seeing,” Plummer said.

Demand to Decline

Making predictions of future economic activity, including steel production, is fraught with increasing difficulty, Plummer said. The current strength of the U.S. dollar adds ambiguity to the forecasting equation, compounding the effects of trade policies.

With such caveats, Plummer ventured to say: “We’re seeing a decline in the relative intensity of steel in major applications, particularly automotive, appliances and a wide range of steel-intensive goods.”

Much of this decline is due to the increasing use of lighter-weight materials in finished goods, he said.
“We’re likely to be seeing steel trending at least moderately downward, peak to peak,” he said, advancing a “best guess” that global steel demand will be down 20 percent at its next peak, around 2030, compared with the last high point in about 2014.

A broad schism is apparent between the boasts of U.S. President Donald Trump and the views of leading economists when it comes to impacts of the current administration’s protectionist trade policies, including last year’s imposition of hefty Section 232 steel tariffs under the guise of national security.

Trump, in his March 2 discourse to the Conservative Political Action Committee, termed the tariffs “the greatest negotiating tool in the history of our country,” proclaiming, “America is now booming like never before.”

However, a March paper from the London-based Centre for Economic Policy Research, authored by economists from the Federal Reserve Bank of New York, Princeton University and Colombia University, called the policies “the worst-case scenario as far as consumers” are concerned and concluded that “the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of US$1.4 billion per month by the end of 2018.

“We also see similar patterns for foreign countries who have retaliated against the U.S., which indicates that the trade war reduces real income for the global economy as well,” the paper continued.

Risks Abound

Various recent economic indicators point to a slowing of U.S. growth, with several risk factors coming into play. U.S. housing starts were up 18.6 percent in January compared with December, but they were 7.8 percent below their January 2018 level, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development, while existing home sales declined 1.2 percent in January, marking a third consecutive monthly drop, according to the National Association of Realtors.

Meanwhile, in February, the Institute for Supply Management’s Purchasing Managers Index dipped to its lowest confidence rating in more than two years, slipping to 54.2 from 56.6 a month earlier.

In July 2018, President Trump declared he had pulled off “an economic turnaround of historic proportions” and said gains are sustainable and will only accelerate. However, according to minutes of the Jan. 30-31 meeting of the U.S. Federal Reserve’s Federal Open Market Committee, or FOMC, U.S. gross domestic product growth is anticipated to slow this year.

“Several participants commented that they had nudged down their outlooks for output growth since the December meeting, citing a softening in consumer or business sentiment, a reduction in the outlook for foreign economic growth, or the tightening in financial conditions that had occurred in recent months,” according to the FOMC meeting minutes.

Risks cited by FOMC members included “the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions.” FOMC members also pointed to “an increase in some foreign and domestic government policy uncertainties, including those associated with Brexit, an escalation in international trade policy tensions, and the potential for additional extended federal government shutdowns.”

All may not be doom and gloom, however. A silver lining may materialize from the U.S. steel industry emerging with a reduced footprint, with newer electric arc furnaces replacing those of the older blast variety, according to the Bank of America Merrill Lynch report.

“This purge of inefficient capacity can ultimately result in a leaner, more competitive, streamlined U.S. steel industry,” the report said. “After the dust clears from Steelmageddon™, an attractive steel industry could emerge. But we would warn investors the path for the next several years of upheaval can be treacherous.”  

A professional journalist for nearly 50 years, U.S.-based Paul Scott Abbott has focused on transportation topics since the late 1980s.

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