Sonja Elmquist at Bloomberg
The U.S. economic recovery is gaining steam and the dollar has surged. That’s bad news for the $100 billion domestic steel industry.
Foreign competitors with weaker currencies pay less to produce the metal. That’s allowing them to undercut U.S. steelmakers in their own backyard as demand wanes in China, Russia and Brazil.
The result: the amount of imported steel used in the U.S. has swelled in the first two months of 2015 to 33 percent from 28 percent in 2014, according to the American Iron and Steel Institute. At the same time, idled production capacity at U.S. mills has grown to 31 percent, the highest since 2009.
“Imports have effectively taken all of the growth upside for the industry,” said Curt Woodworth, a New York-based analyst at Nomura Holdings Inc.
Steelmakers including Nucor Corp., the largest in the U.S, AK Steel Holding Corp. and Steel Dynamics Inc., have all warned that profit is going to take a hit this quarter, and executives are scheduled to be in Washington Thursday to urge lawmakers to trim allowable imports at a hearing of the Congressional Steel Caucus.
Nucor, based in Charlotte, North Carolina, said March 19 that its first-quarter profit will be as much as 71 percent lower than it previously forecast, a change it attributed to the “exceptionally high level” of imports flooding the domestic market. Excess production capacity built by foreign, state-owned companies is the biggest risk to its business, it said.
U.S. Steel Corp. said Wednesday it will idle a steel plant in Illinois, due in part to imports and “unfair trade.”
Nucor’s shares have slipped 3.1 percent this year, while the Standard and Poor’s 500 Materials Index has climbed 1.5 percent. Steel Dynamics is up 4.5 percent and AK Steel has plunged 26 percent. U.S. Steel is down 4.6 percent.
“Here’s an economy that’s doing really, really well but the steel industry is being hurt,” Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University, said in an interview.
“The euro is down 40 percent in just the past year,” he said. “If you’re competing with the Belgian steel industry, can you really compete with that?” he asked. “Really you can’t.”
Capacity utilization, or manufacturing equipment in operation, has tumbled to 69 percent. While utilization has briefly dipped below 70 percent, the current downturn is the first time the industry has maintained that level since the economic recovery began in 2010, said Andrew Lane, an analyst at Morningstar Inc. in Chicago.
Utilization rates at U.S. mills were as high as 80 percent in August. The drop this year brings them to “a level we haven’t seen since the global financial crisis,” Lane said in an interview. The utilization rate is “the most important single data point” capturing the impact of high imports.
“The steel industry and our workers are under attack from a surge in foreign imports that have reached historic levels,”said Tom Gibson, president and chief executive officer of the American Iron and Steel Institute.
Spokesmen for Nucor, AK Steel and Steel Dynamics didn’t immediately respond to requests for comment on how imports are affecting sales.
“Challenging global market conditions continue to impact our company,” Courtney Boone, a spokeswoman for U.S. Steel said by phone.
U.S. steel demand grew 13 percent in 2014 to 118 million tons, compared with 105 million tons in 2013. It’s one of the few regions that’s growing, which explains why steelmakers in other countries are eager to export to the U.S.
Steel usage in China has peaked, China & Iron Steel Association Deputy Secretary-General Li Xinchuang told a conference in Perth, Australia, this month. He expects consumption to slide to 814 million metric tons in 2015 from 823 million tons last year. That’s probably the first decline since the early 1980s, UBS Group AG said March 10.
China produces about half the world’s steel. Falling output there is set to exacerbate a glut of iron ore and coal, the metal’s key raw materials, driving down prices.
Cheaper materials is translating to lower production costs for steelmakers around the world, and lower prices for the finished product. Hot-rolled coil, a benchmark steel product used in everything from clothes dryers to office buildings, has tumbled 25 percent in the last 12 months to $476 a short ton.
At the same time, economic turmoil in Russia and Brazil, among the world’s biggest steel exporters, has contributed to slumping currencies and weaker demand for steel -- creating more incentive for producers to increase shipments to the U.S.
“We’re in an environment of healthy steel demand growth,” Morningstar’s Lane said. “But the irony exists that at the same time the operating environment at U.S. mills has deteriorated.”