The strong market conditions for steel producers that marked the end of 2020 will soon run headlong into new and returning capacity.
The past 12 months have been an international horror show, with the coronavirus wreaking havoc on the economy, society and health. And the steel industry has not been spared the destruction delivered by COVID-19, which will continue to shape life for the foreseeable future.
But as bad as 2020 was, for the steel industry it is the coming year that has long been discussed in apocalyptic terms. This is the year Steelmaggedon arrives.
That term, coined a few years back by veteran steel analyst Timna Tanners, describes the conditions for the North American steel supply chain as a result of the development of additional steel capacity. That capacity starts to come online in 2021.
Tanners and her colleagues at Bank of America Merrill Lynch believe the additional capacity will result in a devastating effect on steel pricing for U.S. mills and their customers, including service centers.
We will soon see how close she is to being right. But as of now, she’s not backing off on her projections of substantial pricing deterioration in the years to come.
“We expect sub-$500 pricing for the next two years, $490 and $475,” Tanners said during an October chat with Steel Market Update. “The premise there is we expect all the new capacity to hit the market, and with that understanding, the market will be under pressure again.”
Tanners’ views of calamity are not universally shared throughout the industry, though most analysts and supply chain players accept the view that the capacity additions will have an impact on the supply chain.
“I don’t think you look at every pound and think it’s additive to the United States,” said Steve Gottlieb, president and COO of Ratner Steel, a flat-rolled specialist based in Rosewell, Minn. “I know people have come up with some terrible scenarios, but once it goes down, some of the high-cost people are going to have to decide what they’re going to do.”
“We’re not in the camp that you’re going to see steel Armageddon, though the actions of U.S. Steel and ArcelorMittal says they are preparing for the worst,” said Chris Plummer, managing director of Metal Strategies Plummer believes the new capacity will ultimately be absorbed in three ways: shutting down some antiquated mill capacity, most likely integrated blast furnaces; replacing imported material and increased exports.
Tanners agreed that if more capacity comes offline in response to the new additions, it will mitigate the harm to steel pricing. However, she’s skeptical the new addition will do much in the way of replacing exports, as the U.S. isn’t the only country in North America adding production capabilities.
Steel Dynamics’ expects to move some of the 3 million tons of flat-roll capacity south to Mexico from its new facility in Sinton, Texas. And while that’s undoubtedly likely, Mexico isn’t exactly standing pat. Steelmakers ArcelorMittal and Ternium have approximately 5 million tons of capacity expansions planned in the country, including 3.5 million tons of sheet capacity. “It makes sense Mexico would consume more of their own capacity,” she said. To truly absorb all of the excess capacity, other foreign markets might need to be located.
Certainly, some older blast furnace could be shuttered permanently, as has happened sporadically over the past few decades. Two such facilities have already gone offline, the former Ashland facility operated by the former AK Steel, and almost 3 million tons from U.S. Steel’s Great Lakes operation.
Other cuts could be forthcoming. Many analysts believe U.S. Steel’s Granite City, Ill., operation could be mothballed, particularly with the company’s investment downriver in its near 50-50 split with Big River Steel. Additionally, U.S. Steel has the option to acquire the remaining shares of America’s newest steel mill, adding to the case against Granite City’s continued operation.
“I don’t question that eventually, sooner rather than later, Granite City will be off the table and closed,” says Plummer. “But you also have to wonder whether U.S. Steel wants to put all that money into upgrading Mon Valley. One of their two blast furnaces is going to need a major reline, when the Gary Works has more than enough space to make up for anything coming out of Mon Valley to feed either the finishing end at Great Lakes or Mon Valley’s portion of the feed going to Leipsic, Ohio.”
The future of the integrated steel production community in the United States was further upended by the September acquisition of most of ArcelorMittal’s U.S. production facilities by metallics company Cleveland Cliffs. That followed the early 2020 deal that put AK Steel in Cliffs’ hands, the two deals further consolidating the primary players in the domestic steel production industry. “It’s an amazing transformation of the U.S. steel, and iron ore, industry, just in six or seven months,” Plummer said.
On one hand, the increased holdings may make it easier for Cliffs to shutter one of its older, less-efficient mills. However, as a raw material supplier, these mills serve as a prime destination for Cliffs’ traditional products.
The move by Cliffs was viewed relatively positively by supply chain participants, hoping it brings additional discipline to the marketplace. “Between the consolidation, the synergies, the fact they now shore up the consumption side of raw materials, I think it’s a good move by Cleveland Cliffs and another step in the right direction for the steel industry,” says Tim Berra, president and CEO of Toledo, Ohio-based Heidtman Steel.
A smaller marketplace should, in theory, also help with pricing, though Coilplus COO Jim Lehr says the history of the industry since the bankruptcies and reshuffling of assets in the early 2000s has not resulted in the much-sought pricing stability.
The industry is heading into 2021 on a higher note, as mills have been pushing up prices in response to stronger demand and an unsettled supply base. Some of the capacity taken offline during the worst of the pandemic has not returned, giving producers some much-welcomed pricing power. Deals have not been easy to find in the closing months of 2020.
And the mills should be able to ride that good fortune into the early parts of 2021, at least. John Packard of Steel Market Update said a number of factors have contributed to the better pricing environment.
“Low inventories, long lead times, and a lack of foreign have all come together to allow steel mills to generate pricing,” he said. And the scarcity of foreign product has been an ongoing trend.
One challenge the steel community will now face is a new presidency. Joe Biden’s victory in the November election has the potential to alter a great many policies the industry has operated under for the past few years.
However, the likelihood of dramatic change, at least in the near future, is slim. Most observers believe the new administration will have far higher priorities than the issues surrounding the steel industry. “If there’s a change in administration, how does that change the dynamic of steel in regard to 232, in regard to taxes,” Gottlieb asked before Election Day. “I don’t see that having any impact until mid to late next year.”
And, in some cases, perhaps not at all. During the campaign, Biden talked extensively about Buy American, and little about getting out from the tariff-heavy policies used by the Trump trade team. While there could be some reconfiguring of 232 to be more accommodating to traditional trading partners, Bank of America Merrill Lynch is not anticipating a major overhaul to President Trump’s signature trade action.
One factor working in its favor is inertia. Once a policy is put in place, and exists for a while, it’s more difficult to get it removed.
“Given all the things Democrats want to address – immigration, healthcare, etc. – any changes will not happen in the short term,” she said.
The one area of possible exception on the steel trade side is the expiration of the slab restrictions, as those were already scheduled to come off by the end of the year.
Additionally, while a reversal on tax policy was a goal of the Biden campaign, the strong possibility the Senate remains in Republican hands make any changes exceedingly unlikely to imagine.Inventories at steel service centers have been at low levels, aiding the price climb for steel. (Metal Center News File Photo)