You Can Ignore U.S. Steel’s Bears at Your Own Risk

U.S. Steel bears

Previously, we looked at the bullish arguments for U.S. Steel (X). Now, we’ll see what factors are attracting the bears (SDS) to U.S. Steel.

You Can Ignore U.S. Steel’s Bears at Your Own Risk

Steel supply

While US steel producers maintained supply by adjusting their production levels, we could get fresh supply starting next year. Big River Steel, with an annual nameplate capacity of 1.6 million tons, is expected to start producing HRC (hot-rolled coil) in December 2016 followed by CRC (cold-rolled coil) in January 2017. Fresh supply from the newly built steel company would negate some of the “supply discipline” from existing steel mills.

Steel scrap prices

While steel prices globally would get support from higher iron ore and coking coal prices, US steel prices generally follow steel scrap prices. You can see this in the above graph. Steel scrap prices have been weak due to subdued demand from mini mills.

Another important aspect to note is that while mini mills like Nucor (NUE) and Steel Dynamics (STLD) would see their input costs fall due to falling scrap prices, U.S. Steel wouldn’t have any tailwind in the form of falling input costs. Rising coking coal prices would lead to a higher input cost for U.S. Steel. It would be at a disadvantage compared to mini mills. AK Steel (AKS) also uses coking coal as a raw material for its blast furnaces.

According to the Steel Market Update, US mini mills can produce HRC at $360 per ton. It would mean that mini mills can make decent money even if HRC prices fall to $450 per ton. However, U.S. Steel might not be able to make much money if HRC prices fall to $450 per ton.

U.S. Steel bears have a few more arguments in their arsenal. We’ll discuss these in the next part of the series.