WSD Strategic Insights CLXVIII: US steel economic condition determined by countervailing forces

The most prominent macroeconomic event of the past several months has been the shocking collapse of several major USA banks whose balance sheets succumbed to a toxic combination of falling asset values – under pressure from rising interest rates (mostly USA Treasury bonds and other long-dated financial instruments) – and a classic “run” on deposits as individuals and businesses feared the eventual collapse would leave them unable to access their cash holdings.  The seemingly “out of nowhere” nature of this crisis has shaken confidence in the stability of the global financial system to a degree not seen since the Great Financial Crisis of 2008-2009, albeit with far less severe consequences to date.  Swift action of the part of USA policymakers likely prevented the further spread of contagion; however, WSD is not convinced that we’ve seen the last of the ramifications of these events. 

As WSD sees it, whereas in February, confidence in the strength of the broader economy remained steadfast despite higher interest rates – in large part due to the fact that overall liquidity in the financial system was still very good (in other words, access to credit for businesses and investors, albeit at a higher cost, was broadly favorable) – the situation going forward is likely to change substantially, especially as lenders a) reconsider existing loan portfolios, perhaps leading to defaults and substantial re-pricing of assets to the downside; and b) greatly reduce new lending activity as they re-consider the risk profile of a slew of underlying investments, particularly in the real-estate sector.  

Looking ahead, the USA price of hot-rolled band appears to face significant downside risks once the mid spring rally comes to an end.  The key question becomes, does the price come crashing down to earth from the “stratosphere” like a de-commissioned satellite, or does it parachute gently from the sky for a soft landing?  As WSD sees it, a number of countervailing forces will determine the outcome:

“Soft-Landing” Positives:

• The USA economy and steel-intensive activity could still see sufficient momentum to keep mill order books in good to excellent shape for another two months
• Domestic steel output remains well below last year’s levels
• Imports, at least to date, show few signs of surging
• Buyers do not appear to have accumulated sufficient inventories – at least relative to today’s still-robust demand – to sit on their hands for a significant period of time
• Infrastructure spending, driven by the large bi-partisan spending package passed in 2021, will likely support some steel demand growth despite a potential slowdown in commercial and residential construction, although the timing of this upside factor remains a topic of debate with some suggesting the upside benefit may not be felt until 2024.

“Crash-Landing” Negatives:

• Several disruptions to domestic steel output appear to be in the process of being resolved, likely leading to a surge in steel sheet production in the months ahead:
• • With the restart of U.S. Steel’s Gary works BF#8 and Mon Valley BF#3 over the last month, virtually all remaining integrated steel capacity is now in operation. Combined, the capacity of the two Blast Furnaces exceeds 3 million tons of annual steel production.
• • SDI’s Sinton, Texas state of the art 3 million ton per annum flat rolled mill is reportedly in the process of overcoming equipment issues that have limited the ramp up of the facility
• • NorthStar BlueScope’ 1 million ton expansion is expected to be fully operational
• • Nucor Gallatin’s 1-million ton expansion is expected to be fully operational
• • Nucor’s 1.2 million ton plate mill in Brandenburg, KY has rolled its first plate. Ramp up is expected over the course of the year.
• • Looking further out, additional significant capacity expansions are underway with capacity coming on in 2024 and 2025
    • ArcelorMittal Calvert’s 2.0 million ton EAF furnace
    • US Steel’s “Big River Part 2” - 3.0 million tons
    • Nucor West Virginia - 3.0 million tons
    • WSD contacts indicate that another mini mill (~3.0 mmtpy of flat rolled capacity) could be announced in the coming months.

This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.

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