At the end of 2019, several large producers announced price hikes,
resulting in a 20% increase in the index over the last two months of the
year. This seemed to have been a sign that the producers’ attempt to
steal market share from domestic and foreign competitors via price
undercutting was being put on hold. Since then, the pricing index
remained steady until late last week, when prices fell around 7%. As of
March 30, the index was priced at $534 per MT, a 10.5% decline year to
date, but still above the low point reached in November 2019.
Demand
for steel in the U.S. is driven predominately by the construction and
the automotive industries, which account for 40% and 26% of consumption,
respectively, according to the American Iron and Steel Institute. The
other two notable end markets for steel in the U.S. are the energy and
the equipment and machinery sectors, which account for 10% of U.S. steel
consumption each. Changes in the expected outlooks of these markets
should affect demand for U.S. steel and, subsequently, prices.
In
most parts of the country, ongoing construction projects have been
deemed essential, allowing them to continue. In certain areas, such as
New York and Boston, state and city governments have refined essential
construction projects to include only those related to hospitals,
transportation and other infrastructure projects. Should more projects
be put on hold, either for reasons directly related to workers’ safety
or because business owners are concerned about the long-term outlook of
their industry, steel demand would weaken, and prices would naturally
fall.
The automotive industry has already begun to feel the impact
of the COVID-19 pandemic. On March 18, Ford, General Motors and Fiat
Chrysler announced they were suspending production at their North
American plants at least through March 30 to help slow the spread of
COVID-19. Further suspension of these operations, or more plant
shutdowns, would likely put pressure on steel prices and cause them to
fall below current levels. Steel inventory and other goods held to be
sold to these plants will likely need to be held until the plants
reopen, which could slow down the cash conversion cycle for automotive
suppliers.
On the supply side, certain steel mills have already
taken action to protect themselves against the anticipated decline in
demand. Steelmaker ArcelorMittal declared a force majeure on raw
materials supplied to its European steel mills in response to COVID-19’s
impact on its European operations. By declaring force majeure,
ArcelorMittal is claiming that because of the unforeseen circumstance of
the virus, the company is no longer able to fulfill its purchase
contracts with raw material suppliers. The firm’s suppliers will likely
challenge the legality of this action, but the risk that similar action
is taken in U.S. steel markets as the virus spreads is something
business owners across the supply chain should consider.
The other
action steel mills are likely to take is a reduction to their
utilization, or steel output. Over the past two years, U.S. domestic
steel capacity utilization has been trending upward. Overall capacity
utilization averaged 79.3% in 2019, compared with 78.2% in 2018. Large
integrated mills typically need to maintain higher utilizations, but
electric arc furnaces are nimbler and can reduce output to better match
demand. We would expect U.S. mills to reduce utilization if demand for
steel products does fall. The good news for people holding steel
inventory is this should result in stable steel prices as supply of
steel and demand for that steel both decline. Businesses that service
the steel industry and depend on volume to drive profits as well as
suppliers to the industry are likely to be most affected if utilization
declines.
