The COVID-19 pandemic is having an undeniably significant impact on the U.S. economy. While many debate the magnitude and duration of the broader pandemic, business owners are left wondering how to manage tasks that used to be routine. Those with either direct or indirect exposure to the steel market have a number of things to consider, such as product availability, pricing, freight and transportation costs and supply chain delays. In this article, we look at current steel prices and what factors could lead to large changes in those prices.1
As has been well publicized, President Trump enacted a 25% tariff on all imported steel in March 2018. While two years have passed, the steel market continues to feel the tariff’s impact. Understanding the lasting effects of the tariff on steel prices is helpful when considering where prices might head.
Immediately following the announcement of the Section 232 tariff, prices rose as consumers, fearing further price hikes, rushed to lock in purchases. Prices reached a high point in June 2018 when the U.S. Midwest Domestic Hot-Rolled Coil (HRC) Steel Index hit $924 per metric ton (MT). With strong domestic demand and rising prices, U.S. steel mills increased utilization in an attempt to grab market share from both domestic and foreign competitors. As supply of U.S.-produced steel increased, prices began to fall, ultimately bottoming in November 2019 when the index hit $492 per MT, a 46.8% decrease from the high point reached just 18 months prior.
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.
COVID-19’s full impact on the U.S. steel industry remains unknown. The only certainty is that we are in uncharted waters. The uncertainty regarding the sector’s long-term outlook will likely remain until the virus’s effect on U.S. workers subsides and businesses can return to their new normal. For business owners affected by the steel supply chain, it is time to ask yourself and your business partners critical questions to help prepare for unforeseen and uncontrollable market changes.
Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020. All rights reserved. PB-03470-2020-04-02
1 For those focused on trends and issues affecting the freight and transportation industry, read our recent interview, “A Conversation with Anton Posner, CEO of Mercury Resources, on the Supply Chain and COVID-19.”