U.S. Steel Corporation
As noted previously, steel scrap prices have been weak this month. Weakness in steel scrap prices could trigger a downwards correction in US steel prices, as we’ve seen frequently. On their part, US steel mills would resist any downwards pressure on steel prices, due to margin compression in the last two quarters caused by the disproportionate increase in steel scrap prices. Either way, U.S. Steel Corporation (X) may not see a positive outcome. Let’s discuss this in detail.
To begin with, let’s review the US steel industry landscape. There are mini-mills, such as Nucor (NUE) and Steel Dynamics, which primarily use steel scrap. On the other hand, U.S. Steel Corporation, AK Steel (AKS), and ArcelorMittal (MT) use iron ore (CLF) as their primary raw material. Although these companies also use steel scrap, their mix is much lower than that of mini-mills.
The first scenario
The first possible scenario would be that US steel producers are able to maintain the current prices. In this case, mini-mills would see margin expansion as their per-unit production costs fall. However, for U.S. Steel Corporation and similar companies, lower scrap prices may not be as positive because they use a lower proportion of steel scrap than mini-mills. To put things into perspective, on average, U.S. Steel Corporation uses 0.3 tons of steel scrap and 1.3 tons of iron ore pellets to produce 1 ton of steel.
Simply put, U.S. Steel Corporation may not see a major margin expansion, even if US steel prices hold steady amid falling steel scrap prices. However, there is a possible second scenario, which could be quite bearish for U.S. Steel. We’ll discuss this scenario in the next article.