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US Steel Industry: Analyzing the ‘Overcapacity’ Situation

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Apr. 15 2019, Updated 12:00 p.m. ET

US steel industry

Last week, two sell-side analysts downgraded U.S. Steel Corporation (X). While Bank of America Merrill Lynch analyst Timna Tanners double downgraded U.S. Steel Corporation from a “buy” to “sell,” Credit Suisse analyst Curt Woodworth downgraded it from “neutral” to “underperform.” Both of the analysts see the expected increase in US steel capacity as a bearish driver. While Tanners referred to the rising capacity as “Steelmageddon” last month, Woodworth called it a “sheet tsunami.”

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New capacity additions

The US steel industry has seen a flurry of investments in new plants over the last year. Nucor (NUE) and Steel Dynamics (STLD) have been at the forefront. Steel companies looked for ways to deploy their cash flows. U.S. Steel Corporation announced a plant restart and commenced the construction of its electric arc furnace at Fairfield. In the commodity space, like steel, prices tend to be a function of demand and supply. The US steel demand growth outlook over the next two years is tepid at best. However, the domestic steel industry is expected to see an influx of incremental tonnage from new plants. US steel mills might have to lower their offer prices to grab market share.

Steel imports

While US steel prices might fall due to higher domestic production, imports might fall, which would offset the incremental domestic supply. Analysts might be getting a little too bearish on the steel industry’s overcapacity situation.

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