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Could US Steel Prices Fall More amid COVID-19?

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  • US steel prices have come under pressure this month following weakness in other industrial metals. The worst might not be over for industrial metals. Global growth is expected to fall sharply this year.
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US steel prices

US steel prices managed to hold their ground initially amid COVID-19. The prices had been falling since the middle of 2018. China’s steel production was strong in January and February despite the pandemic. The relative strength in iron ore prices also played a part. Now, even US steel prices have come under severe pressure. However, they’re still much higher compared to what we saw during the 2015–2016 commodity sell-off.

More room for a correction?

US steel demand has cratered with key end-user industries shutting down operations. Estimates for the US and global economic activity are getting scarier by the day. Goldman Sachs expects the second-quarter GDP in advanced economies to fall 35%. Meanwhile, the IMF expects a 3% fall in global GDP this year. Scrap prices have also fallen and could put more pressure on finished steel prices. Economic activity impacts metal prices. Given the cyclicity in metal prices, they rise when the economy is doing well but fall during economic turmoil. The current economic slowdown is even worse than the 2008–2009 financial crisis.

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US steel production falls

Domestic mills have resorted to plaint closures amid dismal end-user demand and falling prices. In the week ending April 11, US steel production fell 33.6% compared to the same week in 2019. The capacity utilization rate fell to 56.1%. Analysts think that capacity utilization rates below 80% aren’t healthy for the industry. Incidentally, the Department of Commerce also intended to increase the domestic steel industry’s capacity utilization rate above 80% with its Section 232 tariffs.

Have Trump’s Section 232 steel tariffs failed?

Companies expected a structural revival in their fortunes after President Trump imposed a 25% tariff on imports in 2018. Although there was an initial spike in steel prices after the tariffs were announced, they couldn’t hold on to the gains. After peaking in mid-2018, prices have mainly fallen with occasional bounce backs. Prices might have been even lower without the Section 232 tariffs. One reason US steel prices are still above their 2016 lows is that there’s a 25% tariff on imports.

Infrastructure spending

If end-user industries like automotive don’t resume operations next month, we could see more downside in US steel prices. On an optimistic note, President Trump is pushing for an infrastructure stimulus bill. Infrastructure spending could boost sagging metal demand.

Looking at the price action, U.S. Steel Corporation (NYSE:X), Nucor (NYSE:NUE), ArcelorMittal (NYSE:MT), and Cleveland-Cliffs (NYSE:CLF) have fallen 42%, 36%, 47%, and 54%, respectively, in 2020.

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