Outlook For The U.S. Steel Industry Gets Gloomier

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Includes: AKS, NUE, X
by: Alpha World

Summary

The U.S. steel industry continues to face headwinds.

This is happening even as the economy continues to improve.

Rising imports remains a worry.

The outlook for the U.S. steel industry has gone from bad to worse. At the beginning of the year, one major challenge that the U.S. steel industry faced was weak demand forecast for tubular products as a rout in oil prices forced the oil and energy industry to slash capital spending for 2015. But now it seems that the U.S. steel industry will have to contend with some more headwinds; mainly the strengthening dollar and ongoing slowdown in China.

Rising Dollar forces Domestic Steel Makers to Cut Prices

The U.S. dollar has been on a roll lately. An improving macroeconomic environment, contracting U.S. trade-balance thanks to a plunge in oil prices, and higher yields on U.S Treasuries compared to other safe haven bonds, have all contributed to the rally. In the second half of 2014, the U.S. dollar gained more than 16% against a basket of major global currencies.

The domestic steel industry already faces a stiff competition from low-cost steel producing nations like China and South Korea. A strengthening dollar is making imports even cheaper. As a result, steel companies such as United States Steel (NYSE:X) and AK Steel Holding (NYSE:AKS) have been forced to slash their prices. This in turn could erode margins.

According to data from the American Iron and Steel Institute (AISI), U.S. steel imports jumped 24% and 36% in the first two months of the year to 8,024,000 net tons and 6,395,000 net tons, respectively, compared to the same period of 2014.

Imports of practically all forms of steel like bars, rods, cold rolled sheets and tin plates have been increasing. Besides, imports are rising from all markets. During the first two months of this year, finished steel imports from South Korea rose by 59% to 1,310,000 NT, while it climbed 104% to 610,000 NT from Turkey. Steel imports from China jumped 23% to 453,000 NT

This surge follows a similar trend experienced in 2014. Last year, imports from Russia climbed 96% to 6.5 million tons, while imports from China jumped 69% to 2.8 million tons.

Amid rising imports, some of the major steel producers such as US Steel and Nucor Corporation (NYSE:NUE) have been forced to slash prices, according to distributors who purchase steel from them.

Earlier in February, the Wall Street Journal reported that the benchmark hot-rolled coil index dropped 17% since the beginning of the year to about $500 a ton---the lowest price level since August 2009.

China to Cut Overcapacity in the Domestic Steel Industry

Iron ore, a key ingredient in steel-making, is witnessing a terrible run. Last week, iron ore prices tumbled to below $60 a ton for the first time since 2009. Iron ore prices eased as China---the world's largest importer of the bulk commodity--- vowed to slash the supply glut in the domestic steel industry. Speaking at the National People's Congress in Beijing, last week, the country's Premier, Li Keqiang said in the backdrop of decelerating economy, the government was committed to cut the overcapacity.

The announcement comes at a time when the country's GDP is poised to grow at 7% this year--- the slowest growth-rate since 1999.

These are worrying signs because in 2014, domestic steel consumption in China fell for the first time in three decades even as exports from the country rose to a record-high level. Now, a more stagnated domestic demand will further encourage steel exports.

What this means is that the global steel industry will now be flooded with even more Chinese steel as the country looks to stabilize its inventories.

Improving Economy But Outlook Gloomy

The problem for the U.S. steel industry is that its outlook is getting gloomier even as the U.S. economy continues to recover. Steel is a cyclical industry and had come under significant pressure after the financial crisis of 2009. In the second half of 2013, the outlook for U.S. steel makers improved as the economy finally showed signs of sustainable recovery. This even sparked a rally in steel stocks in late 2013. However, the rally did not sustain. Even as the U.S. economy is improving, the global economic environment remains challenging. And this is hurting the U.S. steel industry as the situation has led to increasing imports into the U.S. In this backdrop, the outlook for U.S. steel makers remains gloomy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.