US Steel Prices Fall, Plant Closures Follow

• Steel prices have fallen this year. After a brief recovery in June and July, prices weakened last month.
• There have been some layoffs as the prices fell. U.S. Steel and ArcelorMittal curtailed some of their US facilities. Now, Bayou Steel Group has filed for Chapter 11 bankruptcy protection.

On Tuesday, Bayou Steel Group filed for bankruptcy. According to the Japan Times, the company laid off 376 workers. There have been more job losses in the industry. Steel prices have fallen this year. U.S. Steel (X) and ArcelorMittal (MT) also curtailed some of their facilities. U.S. Steel idled two of its US blast furnaces earlier this year. The company expects the blast furnaces to be idle until at least the end of the year.

Louisiana Governor John Bel Edwards wanted to blame President Trump’s tariffs for Bayou Steel’s bankruptcy. According to the Japan Times, Edwards said, “While Bayou Steel has not given any specific reason for the closure, we know that this company, which uses recycled scrap metal that is largely imported, is particularly vulnerable to tariffs” In the release, the company said that the bankruptcy was triggered “by severe lack in liquidity at the Company, which resulted in a default with its senior secured lender, and created a situation where the Company could no longer purchase raw materials.”

Notably, metal prices have fallen this year. Lower prices have taken a toll on steel companies’ earnings. Last month, U.S. Steel and Nucor (NUE) released downbeat third-quarter earnings guidance. The earnings could fall more in the fourth quarter because steel prices weakened last month. As more contracts roll over, companies could see their average selling prices deteriorate more. For mini-mills like Nucor, lower scrap prices would help offset margin pressure to some extent. However, Nucor also has scrap recycling operations that are impacted negatively when scrap prices fall.

The bottom line is that steel prices are weaker due to global weakness and tepid US demand. President Trump’s trade war has impacted steel prices. As global manufacturing activity falters, it impacts demand and metal prices. So far, the layoffs in the steel industry have made headlines. If prices fall more and stay lower for longer, some of the blast furnaces might feel the heat.

Incidentally, U.S. Steel acquired a stake in Big River Steel, which would give it access to a state of art EAF (electric arc furnace). The company invested in constructing an EAF in Alabama. Typically, EAFs withstand economic cycles better due to their variable cost structure.