Last year, the U.S. witnessed phenomenal growth in steel imports due to the excess global steel-making capacity and strengthening dollar. The significantly higher steel prices in the U.S. as compared to rest of the world also made this an attractive market for foreign producers. The finished steel imports to U.S. rose 35% in 2014 and took an all-time record level of 28% of the market share, despite tariffs on some of the steel products. With continuing imports, that market share climbed to 32% in January.
While the U.S. steel producers have been accusing their foreign competitors of "dumping" the steel in the U.S. -- the illegal practice of selling a product below cost to gain market share -- they have not yet filed a trade case. I believe this was mainly due to two reasons; firstly, it is extremely hard to prove that a foreign competitor is actually selling the product below cost. Secondly, most of the U.S. steel producers had a terrific 2014, with U.S. Steel (NYSE:X) reporting record annual net income since 2008, which would have made it difficult for the industry to prove the negative impact coming from growing steel imports.
Last year, the U.S. steel producers benefited from healthy demand, thanks to the strength in the local manufacturing activity. But this year is going to be different. The increasing imports have forced U.S. steel producers, such as U.S. Steel and Nucor (NYSE:NUE), to slash prices to their lowest levels in more than five years. Last week, Nucor, AK Steel (NYSE:AKS) and Steel Dynamics (NASDAQ:STLD) gave grim forecasts for the future while blaming shipments from China for their woes. The guidance from the three companies was well below market's expectations. Meanwhile, this month, U.S. Steel has temporarily halted an iron-ore plant in Minnesota and has laid-off more than 400 workers to cope with the challenging business environment. Overall, U.S. Steel has shutdown six plants since 2014.
This clearly shows that the rising steel imports will hit the performance of the U.S. steel producers in the current quarter. Although the decline in steel prices in the U.S. should slow down the imports in the second quarter, it won't be enough to improve the market's fundamentals. Nucor's chief has also warned that despite the anticipated slowdown, the imports will remain at "excessively high levels."
But what this also shows is that the U.S. steel producers have now built a strong case against the imports and will likely file a complaint with the International Trade Commission, perhaps as early as next month.
The industry also may have figured out a way to prove that the foreigners are dumping steel in the U.S., which is why the heads of Nucor, U.S. Steel and ArcelorMittal (NYSE:MT) USA as well as the members of the members of the American Iron and Steel Institute (AISI) will be heading to Capitol Hill on Thursday to testify at the Congressional Steel Caucus hearing.
Since the industry has largely pointed fingers at China, the trade case will likely target steel originating from the country. Steel production from China alone matches the total production from the rest of the world. But over the years, the country's growth has slowed down, which hit the demand for steel. China's steel consumption increased by just 1% in 2014 and is expected to climb by 0.8% in 2015. The steel producers, on the other hand, who benefit from support from the Chinese government as well as the cheap iron-ore prices, haven't slowed down. As a result, the country has been exporting the excess supply to all corners of the world. In January, China's steel exports climbed by 63% year-over-year to 9.2 million tons. If the country continues to export at this level throughout the year, then it will easily beat last year's export record by 28.3 million tons.
It is worth mentioning here that although the data from AISI as well as the Census Bureau shows that China is not one of the top three exporters of steel to the U.S, this statistic can be a bit misleading. That's because a lot of steel that comes into the U.S. from places such as South Korea, which is the top exporter of HRC steel to the U.S., is usually slightly processed or in intermediary form and originates from China.
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