Steel is essential it's in everything. Think appliances
like dishwashers and dryers, and fridges and microwaves, or even
air conditioners, not to mention planes, trains and automobiles,
and
every type of manufacturing from machinery needs steel to build
windmills, solar panel systems, certainly to build out the
electricity grid.
When the pandemic threw supply chains into chaos, steel was no
exception, prices dropped, then popped
A boom in steel demand.
Demand is relentless.
I think people feel like steels price will go higher.
I've been looking at this as probably the second biggest
impact to steel makers ever. And I think that the largest impact
is World War Two.
Impending steel shortages become a major problem as America's war
production streamlines into high.
Steel prices spiked 300% over pre pandemic levels, at one
point pricing over $1900. That's up from steel's pre pandemic
price range between $500 and $800.
They have turned into a bubble that and that bubble is they
just go higher because they go higher, we should see prices
move back probably in a pretty violent manner.
Is that the bubble popping?
Yes, yep. Steel is one of those categories, which prices have
really risen dramatically. So certainly one of those examples
of shortages, higher prices, growing frustration among
customers.
Plus steel remains a key material in infrastructure
projects. So the Biden administration's plan to inject
billions into US infrastructure will be a huge boon to the steel
manufacturers.
We estimate that for every 100 billion dollars of new
investment in infrastructure, that's going to mean 5 million
tons of additional steel demand.
2021 steel demand is expected to increase 3.8% over 2020,
according to the World Steel Association.
Can the US steel industry keep up with the demand and what
happens when that bubble pops?
Steel can be manufactured in two ways. First, there's the
integrated method. In the simplest terms, you mine iron
ore, you smelt the ore in a blast furnace with additional
materials like coke, a form of process coal and limestone, and
then you've made steel. But
in the United States today, we actually make 70% of our steel
using a different method, which is what we in the industry we
call the electric arc furnace route.
It's a way of melting down old steel scrap steel into brand new
steel.
Previously blue steel, old carb bodies, refrigerators, steel
that was in old buildings, and that is shredded and melted
down.
Other alloys are added in like some new iron ore and then the
furnaces tipped to pour out the molten steel.
When it comes to clean steel, the US certainly is leading the
way.
But there is work yet to be done to make us steel production emit
less carbon. Two of the US's biggest steel companies, Nucor
and Steel Dynamics, both use electric arc furnaces or EAFs.
If you think about the furnaces, the new cores and the steel
dynamics, they have very competitive cost structures.
They're very flexible in cost. They have a history of really
good financial performance. And certainly their their stock has
increased throughout all of this because higher prices have led
to higher margins, which leads to higher earnings,
but
their stock hasn't moved as much as some of the other ones.
The other ones, Cleveland Cliffs a purveyor of the integrated
method, but they have some EAF mills too. And there's US Steel.
The people that have moved the most though has been Cleveland
Cliffs and US Steel. The market has been very challenging. It's
been very competitive. And they've had to take on an
increasing amount of debt leading up to the pandemic just
to continue on. And then because of the structural change in the
market, these mills earning excessive to historical norm
margins, they've been able to pay down debt, pay off debt or
buy back billions of dollars o shares. So the steel mills real
y are a different company tod y than they were two years ag
Steel prices are good, and they will continue to be strong. It's
all about demand. We have limited supply, and people want
things done right now. So that creates competition. That's the
basis of capitalism will continue to work to reward our
shareholders and to generate the cash that is necessary to
reinvest in our business.
The coronavirus pandemic definitely had an impact on the
steel industry. Now steel producers were generally
identified as essential industries so they weren't shut
down by any government action. But many of our customers saw
big drops in demand for instance, in the auto industry
which buys maybe 25 26% of all the steel produced in the United
States every year, largely shut down in the spring of 2020. And
a lot of construction projects were slowed, everything. So
demand for steel dropped precipitously between the middle
of March and May, so much so that steel producers in the US
responding to that market signal did reduce production
dramatically. We had a number of steel mills that shut down
altogether.
Steel production went way down, and inventories depleted, and
then demand started picking back up.
So we've seen a huge, huge increase in demand. So much so
that you know, steel production today is up 60% over where it
was at the low point back in May of 2020.
The economy began gaining steam in late 2020 as vaccines began
to roll out.
We have seen with this pandemic, locking things down and coming
out of the lockdown was that there truly was a shortage,
buyers could not get as much steel as they required just for
normal operations outside of nobody was able to hoard steel,
nobody was able to build any inventories because the mills
were limited in terms of how much of each contract they could
they can satisfy and they weren't selling much less than
their their contractual volumes just because of this shortage.
And then when demand came around you back distributors were
caught short and then everyone started ordering steel at the
same time. And it does take some time to make that steel. So our
plants started coming back as quickly as they could.
The US also imports a ton of steel.
China is easily the world's leading manufacturer of steel.
So we import a lot of them, we benefit from those low prices.
But again, those tariffs have been in place, and that causes
prices to rise. I'm not saying those tariffs are a good thing
or a bad thing. I'm simply saying that they would tend to
drive up price and they have done that.
The US is the world's largest net importer of steel. Steel
imports are up 17.5% year to date as of August 2021, the US
imported more than 16 million metric tons of steel so far in
2021 as of July. But depending on which country these imports
come from, there's a tax on the steel imports, aka tariffs.
In 2018. President imposed across the board steel tariffs
as a national security measure because they were, the concern
was that the levels of imports coming in were undermining the
viability of the industry over the long term.
President Trump said the increase in imports posed a
threat that could drive US producers out of business,
leaving the country dependent on foreign suppliers. Then he
exempt big trading partners Canada and Mexico from these
tariffs.
When the Trump administration first started to implement those
tariff increases, there was a big squeeze on domestic steel.
So all of a sudden, people said I don't want to pay those
tariffs. I want us manufactured steel. And part of that was
because it just there was this notion of this is by American,
let's produce more here. But what happened of course, when
foreign steel prices go up, the masses steel prices go up. Steel
prices were rising significantly during much of the Trump
administration. And of course, the pandemic.
Customers buying steel felt the impact of both the high prices
and tariffs. On the flip side,
I will say the one good piece of news is because we had those
steel tariffs in place in 2020. The COVID-19 crisis could have
been another demand shock, very similar what happened in the
late 1990s. Or in 2008, 2009, we could have seen a new surge in
imports because when imports come in at very high levels,
they tend to undercut domestic producers, they often sell at a
loss in this market what's called dumping.
Dumping is when other firms or countries come into another
country's market and dump products at artificially low
prices.
We put tariffs on all the crap that they were dumping from
China 25%, they were dumping the steel than we said you can't do
that.
So dumping makes it hard for us manufacturers to run mills at a
profit.
But because we had those tariffs in place, that didn't happen.
And so the industry remained healthy, was able to recover,
continue its investment and be in a strong position to meet the
growing demand that we see today. You want to be running
your steel mill as close to full as you can to really cover those
fixed costs. Plus, you really want to be running at least 85%
capacity utilization, which is where we are today. But back in
those years before the steel tariffs were imposed, we were
running only in the low 70% range. And that was really an
unsustainable level for us. That was because of the high level of
imports coming in in those years.
Tariffs also created an environment that incentivize the
US industry to invest in its facilities.
We've spent close to $16 billion dollars, just since 2018. And
investments in new facilities and upgrading existing
facilities.
We do have pretty substantial amount of new capacity that's
coming online that was in planning to be built for the
past few years. They're coming online in Texas and Kentucky and
in Toledo, Ohio. As that comes online, we expect prices to move
back towards a more historic norm.
I think what really comes next is the mills are going to be
earning incredible profits this year, most of next year.
We have already made in revenue more than $9 billion this year,
in six months infrastructure bill will be an icing on the
cake.
And I think what's next, it really is how are they going to
be investing those profits? What are they doing with it?
For a long time was to continue and invest in the down cycles to
create higher highs and higher lows. So the mills that are
coming up online now are benefiting from that.
As for steel prices in the US,
There's a supply deficit that's supported prices, and that
supply deficit is easing going away. And as that happens, we
should see prices move back probably in a pretty violent
manner, at least in the start, maybe a 15 to 20% drop in a
matter of a month. And as that happens, prices will then be on
there trend line down back towards more historic levels.
Is that the bubble popping?
Yes, yep.
We see we see prices peaking here. And that really, it should
be in this half of this year.
I don't know that I would say that we're in a bubble that's
going to be burst. I think we're going to see continued strong
demand.
The good news is that steel supply capacity will rise over
time a cure for high prices is high prices. So when steel
prices are high, that creates an incentive for suppliers to
increase output and eventually capacity. I think you're going
to see that happen. And so we hopefully will see lower price
at some point in the future, even as the world continues to
use more steel.