Two years ago, the only number that mattered to the North American metal production community was 232. Today, it’s 19.
The outbreak of COVID-19 has become the most meaningful, and damaging, event to strike the global industrial economy in decades, stopping GDP in its tracks when the virus moved from China to Europe and into North America during the first quarter.
The economic effect in the United States was particularly severe. The longest economic expansion in U.S. history was immediately curtailed, with first-quarter GDP down an unfathomable 4.6 percent and the country moving from nearly full employment to millions without work in just a few weeks. A recession that seemed far off in the distance just a few months ago has set upon us, with questions of its depth and length hovering over the entire economy.
Even with many shelter-in-place orders lifted and economies opened starting in late-April, early-May, the effects of the novel coronavirus will continue to be felt as certain areas of activity, particularly segments that put many people in close contact, will remain sluggish.
Metal producers responded to the challenges almost immediately, taking steps to reduce costs. Steel and aluminum producers announced plans to idle various lines and furnaces, which followed similar actions from automotive producers.
Over the course of a single month, more than 12 U.S. and Canadian steel production cutbacks were enacted, many in response to similar shutdowns at domestic auto manufacturers.
The steel production cutbacks hit integrated mills the hardest. U.S. Steel idled four blast furnaces and ArcelorMittal closed three operations, with more being contemplated. Aluminum makers such as Arconic also closed lines in response to the health crisis.
These facilities remained dark into early May, with no significant moves toward restarting. Rather, mills were looking at additional closures to stem the financial losses.
Naturally, the price of hot-rolled coil is similarly challenged, with numbers in the mid-$400 range. The price of HRC fell almost $140 per ton over the course of two months.
Unfortunately, the pandemic was only half the metals industry’s problem in the first four months of 2020. Running concurrently with the virus was the massive decline in oil prices, the result of counter-productive overproduction by petroleum companies in Russia and Saudi Arabia. The tit for tat supply war produced a massive glut, just as the bottom was falling out of demand with fewer vehicles on the road as the virus kept the world largely homebound. Baker Hughes reported its rotary rig count at 465 in late-April, down just over 1,000 rigs at the same time in 2019.
How this all shakes out remains to be seen. Futures markets offer a little bit of optimism that the end of the trough is near for steel, with the late-April settlements coming in at higher levels than a month earlier, though still below January and February, with both natural gas and oil suffering equally.
From the steel side, the concerns are even larger. Before the outbreak, the talk of the steel community was the issue of looming overcapacity, the “Steelmaggedon” as veteran analyst Timna Tanners named it. That threat was a byproduct of the large number of mill expansion projects announced since the launch of the 232 tariffs created some heady days for North America’s producers. Now, we’re looking at many of the major mills going offline, and the response from the steel makers varies. Steel Dynamics, for example, announced in its most recent conference call that its planned 1.5-million-ton flat-rolled mill in Texas is on target for completion in early 2021.
On the other hand, North Star BlueScope announced earlier in the year that the expansion project in Ohio could be held up due to delays in sourcing some parts from China.
Nucor’s multiple expansion projects offer a mixed bag. The company continues to push forward on multiple projects expected to open in 2020, but has delayed efforts on a plate mill, plus projects in Brandenburg and Gallatin, both in Kentucky. Executives there were quick to point out that the projects were merely being pushed back, not taken off the table.
Ultimately, the steel market that emerges from the coronavirus-created recession will undoubtedly look a lot different than the one that entered 2020. Veteran steel analyst John Lichtenstein, managing partner at Research & Consulting Group AG, notes that after every downturn, the steel industry emerges a little smaller than it was beforehand. ?