Everything You Always Wanted To Know About Steel

Summary

• Exploding debt levels means go short bonds.
• Foreign exposed American companies could get selectively hammered.
• Tariffs are extremely negative for corporate earnings if rolled out universally.

We certainly have gotten a crash course on the global steel industry over the past few days.

I, on the other hand already knew the intricacies of this complex industry, as I was the Iron and Steel Correspondent for the Australian Financial Review
during the 1970s. I had to write an original news story about the topic every day for five years!

Suffice it to say that I know which end of a one inch steel I-beam to hold upwards.

So let me summarize for you the issue in a few short paragraphs. No research for me today! I can write this entirely out of my own head.

For a start, I saw all this coming someday, which is why I aggressively recommended a long position in US Steel (X) in August at $21. Yesterday, it traded at $48, up 128%, so well done to those who followed my advice!

If you own any other stocks, read on for the bad news.

The United States has not been cost competitive in steel production for 70 years. Since then, there has been a long succession of countries that could produce steel cheaper than we could, thanks to lower labor costs.

Germany and England were first, followed by Japan, South Korea, Canada, and more recently China, India, Russia, and Mexico.

Foreigners had another big advantage in that the US blew up almost the entire world’s steel production during WWII, except our own.

That meant the new competitors operated with brand new efficient steel mills, compared to our own ancient plants. Go to a US steel mill today and you are impressed with how antiquated everything is, employing processes that are over 100 years old.

A third factor is that the use of steel in all products has been on a secular long-term decline, as advancing technology permitted large reductions in costs and weight.

A new car today weighs half of what it did in the 1950’s. Teslas don’t use steel at all, as they are made entirely of aluminum, carbon fiber, glass, and lithium.

If steel production ramped back up again barely any new jobs would be created. It took ten man-hours to produce a ton of steel in 1980. Today, it is only two. That’s an 80% productivity increase. That's why US steel companies exist at all today.

This has left us with seven generations of declining employment in the US steel industry, from 750,000 in 1946 to 140,000 today. This quickly devolved into a hot button political issue for both parties.

Steel has been a trade issue at least since the 1950s, when the US sought to protect a retreating industry with jawboning, quotas, and tariffs. It was always a losing battle.

Punitive tariffs like the 25% duty imposed by the president have not been used as a trade tool for 80 years for good reason. Tit for tat tariffs employed by countries during the 1930s are now widely understood to have greatly extended the Great Depression.

They are also illegal, a violation of rules laid out by the World Trade Organization, and will almost certainly be overturned in future litigation.

Tariffs were also abandoned because they make no sense for the US economy. At most, higher steel prices will create a few hundred jobs.

But they will also raise prices on all steel containing products for 330 million American consumers. That means it is costing millions of dollars to create a single job in the steel industry.

It is also bad for the steel industry over the long term. Higher prices will force them to cede foreign markets and only sell to the domestic market.

In the meantime, the largest users of American steel, the auto industry, has seen the cost of their vehicles rise by a few hundred dollars each.

That erodes their ability to compete with imported cars made with cheaper foreign steel. Notice that the shares of General Motors (GM) got slaughtered, off some 12% in two days.

The stock market got it right with the 1,500-point swoon in the Dow average the tariffs triggered. Steel producing companies saw the value of their companies rise by $2 billion. Steel consumers saw the value of their shares fall by $150 billion. No, the risk/reward doesn’t look right to me either.

Foreign steel exporters are certain to retaliate. Target number one will be the US agricultural exports, where it enjoys a major cost advantage of its own.

This is why you heard so much carping from red state congressional representatives. Note that wheat (WEAT) prices, the most internationally traded ag commodity, dove some 4.8%.

Retaliation could spread to other globally traded US products, such as those in high tech (Apple (AAPL)), services (JPMorgan (JPM)), aircraft (Boeing (BA)), and even Coca-Cola (KO) (see more in the piece below). This is why the steel issue has taken the entire market down, including most sectors.

There is also a national security element to all of this. Some of the largest exporters of steel to the US are military allies, like Japan and South Korea.

Attack some of their most important strategic industries and they will be less likely to assist us in any future military alliance. The steel tariffs could well push them into the China orbit.

And last of all, who is the largest foreign owner of US Treasury bonds? You guessed it! You already know from my “Exploding Deficits” Series that it is China, with $1.2 trillion of American paper, and who have already started boycotting recent bond auctions.

My guess is that trade will remain a growing weight on the stock market.

Who do we bail out next? The buggy whip makers?

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[j. hughes]

The short term solution is a social security net; the longer term solution is education.

[sleek]

>> That erodes their ability to compete with imported cars made with cheaper foreign steel. <<

So the steel comes in that way instead, embedded in those imports.

[MetalMen22]

Its more than just modernizing steel plants. The USA has spent a significant amount of money on EPA regulations that other countries (mainly China) didnt have to abide by. China is finally starting to clean up their act but still several areas that have smog so thick you cant see in front of you.

[hcstory3]

After wasting large amounts of national treasure to decimate the axis powers the u.s. not only put up the money and expertise to rebuild those economies and gave them unfettered access to our markets tariff free but we allowed them to tax our exports so their central gov's had funds.. as a young boy in the early 50's we filled up large boxes with food and clothing and posted it to europe..
those are now mature economies ( germany, japan and s. korea come to mind) and the bs has to stop.. it should have been stopped long ago but no balls in d.c.. we have gone from 11 aluminum smelters to 6 and only 1 that makes the high grade we need for defense projects.. china produces an excess 500mm tonnes of steel p/a and dumps it at whatever price they can get.. mex and canada will get carve outs..
we have been getting the smelly end of the stick for so long hardly anyone knows what the clean end looks like..
imo

[123semi]

IDSA - best way to play steel. This microcap is starting to rip. $5 stock soon.

[Wiekierc]

"Go to a US steel mill today and you are impressed with how antiquated everything is, employing processes that are over 100 years old."

YET...

"It took ten man-hours to produce a ton of steel in 1980. Today, it is only two. That’s an 80% productivity increase. That's why US steel companies exist at all today."

So are they antiquated, or are they modernized and efficient?

[User 21722451]

Modernized and efficient. Billions have been spent in the USA over the last 40 years to transition from BOF to EAF melting technology and from ingot cast to the continuous casting process. The author admitted that the last time he wrote about steel was 40 years ago, and it shows!

[JeromeB]

Glad you are beating the drum.
"That means it is costing millions of dollars to create a single job in the steel industry."
Not only in company values, but also out of every American's pocket for everything we buy.

[Azred]

Steel, Aluminum, Copper. I thought the U.S. government had to use Copper on all its government installations, etc, I actually thought all power lines, Utility poles ran Copper but boy, oh boy, all those power lines we changed out at one particular Navel base and myself running back & forth from the recycle scrap yard with -back then- literally truck loads of the old copper lines from the poles we took out that had been there for just about forever, resulting in beat piles of cash during every run. Well, those were the days! Then I found out along the way that actually all those power lines out there? They take aluminum just as well. It’s just the government likes the Copper, I guess. And, aluminum is cheaper. We aren’t too far from retirement now. A year more. Maybe two, max. It feels good and to the degree of how so much has changed over the years it is feeling better by the minute. A lot of patience is required. I hope the young man taking over our business knows that by now. I think he does. Materials don’t come in from suppliers like they once did. Just preparing for a job is a royal pain. Talk about regs? Try being a contractor going for a simple 1 million dollar job. I don’t know how the bigger companies or bigger jobs to a company, does it. They have to have whole entire departments working on material job lists, code numbers, submittals. This last job we have and (finally) have been working on, took 3 months to get off the ground. Then you have suppliers today. Can’t get a couple pallets of materials to you for several weeks out. Sometimes, your given a date, but it’s a week or two weeks late. Back & forth to the phones. Another thing, By the rules. Uncle Sam says all materials used are U.S. made. Not entirely true. The clause and code numbers come into play with every little thing required to purchase for that job. It’s up to you to dig through the code numbers and find the one that lists the item as 55% made in U.S, the rest some other country. But as long as a portion of the piece you made was made here it will be approved then it may, or may not - fly. Finally, the submittals to make, to comb over every single item by line, can take weeks. Really, this stuff needs a whole program of its own + the Ppl who knows how to sort it all out. Doing it by human manually takes hours and hours a day 5-6 day’s a week until all prices and materials are broken down, laid out and sent in for “approval” No vendors in the U.S, sell materials solely made in the U.S. We’ve seen the best of it in Construction. Skilled workers are gone. Skilled Ppl in the office have shrunk. Materials are difficult to get in on time. And all these things count, too.

[SecretUser]

Industry question: what is the majority of US steel production comprised of (1) re-cycled scrap steel, (2) or new steel from iron ore. If the latter, where does the Iron Ore come from, domestically by trains or imports?

I ask for the knock on effect as opening up a new iron ore trade into the US should be quite beneficial to drybulk shipping markets

[User 17496782]

new iron mostly from northern great lakes area- US Steel in Georgia gets or did get raw iron from GA- the use of scrap would never keep up with demand - new iron must be processed thru blast furnace to separate iron from rock - we still ship scrap overseas depending on prices

US Steel makers beat to death by Unions - YES your wrap them up in Red White Blue steel workers destroyed thier own jobs as the UAW does today

US Steel makers did not improve US mills as they were selling steel to new mills overseas

the US will probably NEVER allow mills to shut down in USA for defense reasons
AKS is well run and cheap
I MISSED buying USS at $7

[buddyrow4]

hello MHF
i cant help but feel some industries need to remain viable. some factories in america was a major factor in determining the out come of WW2.
some industries need to remain for national security reasons.
higher prices maybe what is needed to ensure some industries remain viable.
i very much enjoy your posts.....over look any spelling errors i think this is the my longest response to a poast