Last year, President Trump slapped a 25% tariff on US steel imports. The Department of Commerce’s investigation determined that steel imports are a threat to US national security. The tariffs were imposed under Section 232 of the Trade Expansion Act of 1962, which helped President Trump move ahead with the tariffs without approval from Congress.
All of the steel stocks including U.S. Steel Corporation (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD) are way below their March 2018 price levels when the tariffs were imposed. Steel stocks have been subdued even though Nucor and Steel Dynamics posted record earnings last year. U.S. Steel Corporation and AK Steel also posted higher earnings last year. However, steel companies’ earnings are expected to fall this year. US steel prices have fallen to the lowest level since 2016, according to Bloomberg.
Purse strings are wide open
Amid higher earnings last year, US steel companies opened their purse strings. Last year, Nucor earmarked $1 billion towards growth projects. The company announced a rebar mini-mill in Florida with a $240 million investment. Nucor also announced a $240 million investment for constructing a galvanizing line in its Arkansas sheet mill. The company announced a $650 million investment to expand the capacity at Nucor Steel Gallatin by 1.4 million tons annually. Earlier this year, Nucor announced a $1.3 billion investment to build a plate mill. Steel Dynamics also announced a 3 million ton per annum capacity steel mill last year.
While Nucor and Steel Dynamics have been looking at greenfield projects, U.S. Steel Corporation announced a series of projects to modernize its existing plants. In May, U.S. Steel Corporation announced a $1.2 billion capex plan. The plan would be in addition to the company’s ongoing $2 billion asset revitalization plan. U.S. Steel Corporation also restarted its abandoned Fairfield electric arc furnace project. The company is investing in a new dynamo line in Europe. However, given U.S. Steel Corporation’s balance sheet, it might have bitten off more than it can chew.
Reshaping the US steel industry
Life has come full circle for US steelmakers. U.S. Steel Corporation announced the curtailment of two blast furnaces last month. Ironically, the announcement came on the same day that President Trump started his 2020 campaign. During his 2016 campaign, President Trump’s key platform was protecting steel jobs. U.S. Steel Corporation restarted two blast furnaces at its Granite City facility last year. President Trump visited the facility after the announcement.
Looking at the additional capacity added by mini-mills like Nucor and Steel Dynamics, we could see them double down on capturing market share from integrated steel producers. AK Steel has already scaled back its operations in commodity-grade steel products. With their variable cost structure, mini-mills manage to tide over steel cycles better compared to integrated producers like U.S. Steel Corporation and AK Steel.
Electric arc furnaces use steel scrap as the prime raw material. US steel prices and scrap prices tend to move in tandem, which gives mini-mills a natural hedge against raw material price fluctuation. U.S. Steel Corporation and AK Steel mainly use iron ore where prices tend to be delinked with US steel prices. The current scenario is a perfect example where seaborne iron ore prices moved to a five-year high despite weakness in steel prices.
As mini-mills add more capacity, they could continue to snatch market share from domestic blast furnaces. However, higher domestic capacity would lead to import replacement. The Department of Commerce wanted to replace imports with domestic production through the Section 232 tariffs. Read Have Trump’s Steel Tariffs Failed? for a detailed analysis of what the Section 232 tariffs have achieved in the last 16 months.
Read US Steel Industry Outlook: Will June’s Momentum Continue? to see which steel stocks offer value at these levels.