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The U.S. steel industry is buoyant in the backdrop of a favorable regulatory environment. The goal of the government is to revive the industry, which has seen a steady decline as local production was increasingly substituted with cheaper imports.
Steel imports have jumped from $22.7 billion in 2010 to $29.1 billion last year, according to the U.S. Census Bureau with the country remaining the world’s largest importer of steel. Further, USGS data shows that while steel mill and semi-finished product imports were 36 million metric tons (MMT) and 8.4 MMT in 2017, steel mill exports were a mere 11 MMT.
Steel Import Monitoring and Analysis (SIMA) data says that in the year ending January, 35% of imported steel comprised flat products, 28% pipes and tubes, 19% semi-finished and 18% long products. Canada (19%), Brazil (13%), Korea (12%), Mexico (11%), Turkey (5%) and Japan (5%) were the top exporters to the U.S.
So the prospect of a 25% tariff on imported products was seen as a positive for the industry that could perhaps help it generate higher volumes and stronger pricing. A longer-term benefit (because it is capital intensive) could also be the resuscitation of operations that were shut down in the last few years as a result of consistent Chinese dumping.
But there was a catch: Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea were granted exemptions until May 1, so they could negotiate more favorable terms with the U.S. as regards their steel exports to the country, something the government has flagged as a national security concern. Since the list includes all of the top steel suppliers to the U.S., the May 1 deadline has assumed great importance.
Moreover, even if these deals work out, the government will introduce a quota system, so cheap Chinese products can’t sneak in indirectly through dumping in any of the supplier countries.
While the tariff will bring pricing support, it will also result in some challenges.
For one, it is practically impossible to take China out of the pricing equation because it is the world’s biggest producer, exporter and consumer of steel. On the positive side, after the EU raised its antidumping duty on Chinese steel from a range of 18.1-35.9% to a range of 48.3-71.9% in March while also extending the period by another 5 years and Mexico did likewise on carbon steel pipes that were threatening its domestic producers, China said it would lower production in a phased manner over the next few years. It did however announce a retaliatory tariff of 25% on U.S. seamless steel pipes in response to President Trump’s actions.
Second, the U.S. imports a lot of steel pipes and tubes, such as those used in the energy industry. Whether domestic operations are currently geared to making those is debatable since a facility making sheets can’t easily be adapted to making pipes instead. Shutdown operations may be retooled for the purpose, but it will require significant time and investment.
Third, the U.S., while still a big producer of pig iron, has gradually been moving away from ore-based raw materials to scrap instead. When the price of steel goes up, so does the price of scrap. Companies currently expect to pass this on to customers if competition from cheaper imports is controlled. But whether those customers are in a position to absorb the much higher priced steel is a big question.
Which brings us to the fourth challenge. The top consumers of steel products in the U.S. are currently construction, automobile, energy, machinery & equipment, container, appliances, defense & military industries, which accounted for 40%, 26%, 10%, 10%, 4%, 4% and 3% of U.S. steel demand in 2017 (statista). So if steel prices go up, so will the costs for all these industries. This will hurt their profitability, make their output less competitive, and might lead them to curtail production. If they curtail production, steel producers will be hit again.
So the big question before us now (other than price) is the level of demand that steel producers are seeing, which we can gauge from management comments, utilization rates (both current and expected) and revenue estimates. What a good thing that we are in the earnings season!
Recent Earnings Reports Paint A Rosy Picture
Nucor Corporation NUE reported revenue and earnings that were both ahead of the Zacks Consensus Estimate. Revenue grew 15.6% from last year while earnings grew 5.4%. Average selling price (ASP) grew 9%. Management said on the call that utilization at its steel mills was up.
The Zacks #2 (Buy) ranked company’s June quarter revenue estimate of $6.29 billion is up 2.7% from January while the September quarter revenue estimate of $6.38 billion is up 7.9%. The estimates represent 21.5% and 23.4% increases from the respective quarters of 2017.
Steel Dynamics, Inc STLD reported strong revenue and earnings, both of which topped the Zacks Consensus Estimates. Revenue grew 10.0% from last year while earnings grew 17.1%. ASP grew 11%. We’ll know about the utilization after the call.
The Zacks #1 (Strong Buy) ranked stock’s June quarter revenue estimate of $2.82 billion is up 7.2% from January while the September quarter revenue estimate of $2.86 billion is up 10.7%. The estimates represent 18.0% and 17.1% increases from the respective quarters of 2017.
ArcelorMittal’s MT fourth quarter earnings report was in February, so it doesn’t capture the tariff drama. But the estimate revision trend may tell the story.
The Zacks #1 ranked stock’s March quarter revenue estimate of $19.38 billion is up 5.0% from February while the June quarter revenue estimate of $21.15 billion is up 16.7%. The estimates represent 20.5% and 22.7% increases from the respective quarters of 2017.
United States Steel Corp. X will report results next week. The Zacks #1 ranked stock’s March quarter revenue estimate of $3.10 billion is marginally down from February while the June quarter revenue estimate of $3.45 billion is up 3.3%. The estimates represent 13.8% and 9.7% increases from the respective quarters of 2017.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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