President Trump’s tariffs
According to the American Iron & Steel Institute, US steel production fell 1.2% on a weekly basis in the week ending June 29. The US steel industry’s capacity utilization rate, a key metric to gauge the industry’s health, fell to 79.5%. While the capacity utilization is still higher on a year-over-year basis, it fell on a weekly basis. When the Department of Commerce recommended the Section 232 tariffs to President Trump last year, it aimed to improve the US steel industry’s capacity utilization rate. President Trump swiftly acted on the Department of Commerce’s report. He imposed even higher tariffs than what the Department of Commerce suggested. The tariffs were welcomed by US steel companies like U.S. Steel Corporation (X), Nucor (NUE), AK Steel (AKS), and Steel Dynamics (STLD).
The Department of Commerce’s report said, “The quotas or tariffs imposed should be sufficient, even after any exceptions (if granted), to enable US steel producers to operate at an 80 percent or better average capacity utilization rate based on available capacity in 2017.” Before the tariffs, the US steel industry’s capacity utilization rate had been below 80% since 2014. Is the capacity utilization rate really an important metric?
Capacity utilization rate
The capacity utilization rate is an important metric that impacts steel companies’ profitability. Running the plants at a lower capacity increases the unit production costs. Companies like U.S. Steel Corporation and AK Steel operate blast furnaces that tend to have a higher fixed cost structure. The electric arc furnaces that Nucor and Steel Dynamics operate have a higher variable cost structure. Steel prices and the capacity utilization rate also tend to move in tandem. Generally, with higher unused capacity, companies compete aggressively for business, which depresses steel prices.
The US steel industry’s capacity utilization rate rose after the Section 232 tariffs. U.S. Steel Corporation restarted two blast furnaces at its Granite City facility. President Trump visited the facility and showcased how the administration’s policies have supported the US steel industry. A year later, life has come a full circle for US steel companies. Last month, U.S. Steel Corporation announced that it would curtail two blast furnaces in the US. The announcement couldn’t have come at a worse time for President Trump. He launched his 2020 reelection campaign on the same day. President Trump seems to think that the US steel industry is going through the roof due to his Section 232 tariffs.
US steel prices have fallen in 2019. The prices are way below the levels in March 2018 when President Trump imposed the Section 232 tariffs. U.S. Steel Corporation’s plant curtailment could restore some supply discipline and help lift US steel prices that are underperforming global steel prices in 2019. After U.S. Steel Corporation’s announcement, steel mills announced price hikes. U.S. Steel Corporation also announced the curtailment of a blast furnace in Europe. ArcelorMittal (MT) gets half of its revenues from Europe. The company announced two production cuts in 2019. ArcelorMittal blamed higher imports and weak steel demand in Europe for its decision.
Reason to panic?
While the US steel industry’s capacity utilization has fallen below 80%, it isn’t really a reason to panic. First, the lower numbers are only for one week. Second, the fall was largely expected after U.S. Steel Corporation’s plant curtailment announcement. What’s more important for US steel companies is that the recent price hikes stick in what still looks like a soft market. Read US Steel Industry’s Outlook: Would the June’s Momentum Continue? to learn more. The lower capacity utilization rate has put the spotlight on President Trump’s tariffs. The Section 232 tariffs offer insights into why trade wars aren’t easy to win. Read Are Trade Wars Easy to Win? Lesson from the Steel Industry to learn more.