US steel industry
Last year was quite remarkable for the US steel industry. Despite the slowdown in steel prices in 4Q17, steel companies posted higher earnings. Steel Dynamics (STLD) reported record operating income last year, and Nucor’s (NUE) 2017 earnings were its highest since 2008, when the steel industry was at its cyclical peak.
U.S. Steel’s (X) 2017 earnings were also its highest since 2014. Given these earnings, one could argue that the US steel industry doesn’t really need more trade protection. We’ll discuss this perspective further below.
Currently, steel market conditions are strong enough to absorb a higher level of steel imports (MT). The problem arises during cyclical lows, when global steel prices fall and US steel mills have to lower their offers.
In 4Q15, higher imports coupled with low steel prices led to a sharp decline in US steel production. Steel companies globally allege that Chinese steel is cheaper due to subsidies offered by the government, while US steel companies claim that US steelmakers can compete with China on a level playing field.
Meanwhile, China has taken measures to address its steel overcapacity, and we’ve seen a sharp reduction in Chinese steel exports last year.
Along with protection during cyclical lows, the US steel industry does appear to need some sort of reprieve in certain product categories. Grain-oriented electric steel (or GOES) could be an example where AK Steel (AKS) is the only US-based producer of products that are used in electrical transformers, but the company’s GOES operations have been negatively impacted by higher imports in that category.
Meanwhile, while the US steel industry also has reasons to celebrate after the Section 232 recommendations, we need to observe how tariffs have impacted steel markets elsewhere.
In the next part of this series, we’ll discuss how restrictions on steel imports have impacted the Indian steel market.