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US Steel Mills Maintain Supply Discipline: Will It Help?

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Supply discipline

According to data released by the AISI (American Iron and Steel Institute), US steel production fell 4.9% YoY (year-over-year) in the week ended September 24, 2016. Steel production had fallen 3.3% and 3.6% YoY, respectively, in the preceding two weeks.

US steel production has fallen 1.4% on a year-to-date basis. However, the rate of decline has increased over the last few weeks as US steel producers have adjusted their production levels.

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Lead times

So, what are steel companies achieving by lowering their production levels? Well, by lowering their production levels, steel companies can maintain higher lead times for their steel products. This creates a somewhat artificial shortage of steel in the US market (DIA).

Higher lead times support steel prices. Steel companies such as U.S. Steel (X), ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE) benefit from higher steel prices.

Having said that, while the US steel market seems to be in a short-term supply deficit, there’s no shortage of steel in international markets. Higher lead times and the resulting higher US steel prices will push more steel buyers to source their needs from overseas.

Would it help?

If steel buyers are able to develop reliable supply channels from new countries, we could see another round of structurally high imports in the US market. US steel companies have filed another trade case against Vietnam alleging transshipments of Chinese steel products through Vietnam.

In our view, steel imports could stay elevated unless US steel prices, especially in the cold rolled coil space, correct and the spread between US and international prices narrows.

You can read Déjà Vu: How Could Flat Trade Cases Play Out? to explore why trade protection can’t be a long-term solution.

You can also visit our Steel page for more updates on this industry.

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