The steel market in the US continues to remain in a limbo, four years after the global economic recession. The demand continues to remain lackluster, coupled with steady stream of supply leading to a lack of recovery in steel prices. With the US economy growing at only 2.5% in Q1 2013 and 0.4% in Q4 2012, this less-than-desired recovery is adversely impacting the US steel industry.

Besides this slowing growth, with a net import of about 17 million metric tons of steel in 2012, the US steel market faced an estimated surplus of 13 million metric tons in 2012. Monetary policies, global economic conditions, raw material cost pressure and Chinese steel industry's influence have all contributed to this current state of the US steel industry, leading to:

  • Falling revenues for steel producers
  • Lack of recovery in steel prices
  • Cautious procurement and minimisation of inventory among consumers

The US market is currently witnessing a tussle between the producers and consumers, with price being the point of contention. On one hand, steel mills are desperately trying to support the steel prices with periodic hikes. On the other side, consumers remain skeptical about these measures. Producers and consumers are facing a different set of challenges as well. With steady flow of imports and a lack of recovery in demand being the challenge for steel mills, consumers are apprehensive about inventory levels and uncertain price movements.

Demand and Imports

Steel makers have continued to go about without a major cutback in productions, due to their optimistic view about a recovery in demand. Although the US automobile industry has continued to perform strongly, and construction spending is witnessing a gradual recovery, the overall demand has yet to improve significantly. A slowdown in European and Chinese economies in the second half of 2012, coupled with muted performance of the US manufacturing sector, has led to weak demand in the past months.

The much-anticipated seasonal improvement in steel demand and consequent restocking activity in the first quarter of this year have failed to materialise. This led to a decrease in steel prices in the first few weeks of this year — a rare phenomenon considering that only during four years in the past twenty years have steel prices not increased in this seasonally strong period for steel demand.

Besides these factors, the ever-existing threat of imports from East Asia also persists. The slowdown in growth in major Asian countries, including China, led to a surplus in the steel markets of these countries. The continuation of weak demand in Europe added further pressure on Asian steel producers (major exporters), thereby leading to increased exports in to the US. These factors led to imports exceeding 30 million tons in 2012, a yearly increase of 17%.

The flow of imports into the US has witnessed a steady increase in the years following the recession in 2008. This has been primarily due to the fact that the Chinese steel market has been in a state of surplus over the past 4 years. The overcapacity in China, coupled with the recent slowdown in the Chinese economy, has resulted in this surplus, leading to Chinese steel mills looking towards export markets (mainly the US, owing to poor demand in Europe) to mitigate the surplus in the Chinese market.

With the growth in Chinese economy set to remain below 8% in the medium term (next 3–4 quarters), steel production will continue to outstrip demand. In 2013, Chinese market is expected to grow to a surplus of 59 million metric tons, whereas in 2014 it is expected to reach 62 million metric tons. Besides the slowing growth, the possibility of monetary tightening measures by the Chinese government in 2013 is high. Rising inflation levels are expected to lead to monetary tightening measures in the second half of 2013. Any such measure will likely lead to a slowdown in Chinese construction and manufacturing sectors, thereby impacting the steel demand and contributing further to the surplus. Continuation of this surplus in Chinese steel market will lead to increased imports into the US in the next 12–18 months, thereby preventing any major recovery in the US domestic steel prices.

Utilization and Price

There is a well-established rule in the US steel industry that states that a capacity rate above 80–85% is crucial in supporting the steel prices. Higher is this rate, easier for steel makers to maintain high steel prices. The utilization rate went above 80% only once in the past 40 months, indicating the difficulty faced by American steel makers.

The lower operating rate has been the crucial factor behind the lack of success faced by steel mills in increasing the steel prices. There have been 10 different price hike announcements by US steel producers in the past year, most of which aimed at arresting falling steel prices. Most of these price hikes failed to materialise, indicating the poor market sentiment amid low utilization rates (in the same period, the average rate has been at 75%).

Steel Industry Revenues

Steel makers' revenue have been under constant pressure for the past couple of years. Collective quarterly revenues of the US-based steel producers in Q4 2012 was at USD 11,830 million, well below the revenue levels witnessed before the recession.

Average HRC price in 2012 was at USD 720 per ton, a 13% fall from 2011 average price. Lower steel prices and lack of improvement in demand are leading to falling revenues and subsequently falling operating margins. Under current conditions, the differential between production cost (HRC BOF process) and the HRC price is at USD 10–20 per ton for BOF process and USD 120 per ton for mini-mills — a drastic drop from USD 130 per ton (BOF) and USD 180 per ton (mini-mills) a year ago. The lack of recovery in steel prices amid an increase in ferrous scrap prices is hurting the profitability of American steel mills. The muted demand conditions is a barrier for steel makers to pass on any rise in raw material cost to consumers, thereby leading to further adverse impact on the steel mills' revenues. The lack of intent on the steel producers' part to rationalise capacity and tighten the surplus in the market is a further self-inflicting factor on their profitability.

This trend of rising imports is set to continue for the remainder of 2013 as well. The current differential between import price and the US domestic price is at USD 40–60 per ton (HRC). An expected decrease in iron ore prices in the second half of this year, coupled with the seasonal slowdown in Chinese demand, will lead to a fall in Chinese steel prices from early Q3 2013, leading to cheaper imports into the US. These factors are expected to lead to a 21% yearly increase in imports from China into the US this year.

Once the price differential (domestic vs. import) increases beyond USD 80–100 per ton, domestic steel becomes less attractive, leading to further problems for the US steel makers. This will further weaken steel makers' position in terms of hiking the steel prices. Being the most expensive center of steel production, the US steel makers do not have an export market, thereby further narrowing their scope.

Impact on Procurement

The suspension of the US debt ceiling through September 2013, has only added further caution and pessimism among consumers over the demand prospects for steel. Amid political debates over ways to reduce national debt, prospect of spending cuts impacting the steel demand remains high. With this added caution, steel consumers will continue to go ahead with a conservative buying practice in the coming months. Steel mills will continue rolling out periodic price hikes in the remaining months of 2013, aimed at preventing any further fall in steel prices and support their falling margins. However, under current market conditions, most such expected hikes will not materialize. With a limited room for steel mills to increase the steel prices, consumers will continue to maintain minimal inventory levels amid this uncertain demand period. Spot purchasing will only be carried out on a “hand-to mouth” basis for immediate requirements.

About the Author

Badri Narayanan is a senior research analyst with Beroe, Inc., a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. Narayanan specializes in tracking various steel markets and related alloys. He has worked on multiple projects for many Fortune 500 clients involving categories such as steel, stainless steel, ferroalloys, etc. Narayanan earned his degree in Metallurgy and Materials Engineering from the National Institute of Technology-Trichy.