Crisis in the Steel Industry

Like much of the commodity complex, the last 12 months have been brutal for the steel industry, with prices falling to 12-year lows as currency headwinds, oversupply and dwindling demand prevail, resulting in mass job cuts in the sector. A glut of global steel production has led to the dumping of steel into the U.S. market at historic levels and in violation of international trade rules. The global steel industry is currently suffering from a crisis of overcapacity, and the Chinese steel industry is the predominant global contributor to this problem.

While the automobile and construction sectors continue to support demand, the steel industry is currently facing three major headwinds: falling prices, economic slowdown in China and foreign steel imports into the U.S. Economic slowdown in China has dealt a massive blow to the global steel industry. China’s steel industry is still reeling under overcapacity with barely any signs of recovery. As the uncertainty in China increases, banks are becoming tighter and reducing their lending practices resulting in many producers racking up significant debts. With internal demand falling and supply showing no signs of diminishing, China has been forced to sell abroad. According to the Steel Manufacturers Association, through November 2015, China exported over 100 million metric tons of steel to the world, already exceeding a record-setting 2014 at 94 million metric tons.

A supply glut and faltering demand made steel cheaper in 2015 than at any time in the past decade. One of the world’s biggest producers — ArcelorMittal, reported an annual loss of close to $8 billion in 2015. ArcelorMittal has been cutting costs at its U.S. operations, where it’s looking to close finishing lines, including at ArcelorMittal Indiana Harbor in East Chicago. U.K. based Tata Steel announced plans last month to cut another 1,050 jobs on top of the 1,200 jobs axed at the Indian owned group last October. The recent closure of steel facilities in the United Kingdom has led the EU to scramble to determine how to address the problem of Chinese overcapacity despite a number of ongoing investigations.

About 12,000 steelworkers in the United States lost their jobs last year, due to the unprecedented import crisis, according to the Alliance for American Manufacturing. A flood of cheap imports was largely blamed on China, which went from exporting about 90 million tons of steel in 2014 to about 120 million tons in 2015, throwing world steel markets into turmoil.

Demand slowdown and global overcapacity have resulted in very low international steel prices. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined, according to the European Union Chamber of Commerce. That’s causing trade frictions as China cuts prices. On Feb. 12 the EU announced it would charge antidumping duties of as much as 26.2 percent on imports of Chinese non-stainless steel.

According to a report released by the Commerce Department; in 2015, U.S. imports of steel mill products totaled 35.1 million metric tons, a 12.6% decrease from 40.2 million metric tons in 2014.

– In value terms, imports have shown a larger decrease than by tonnage, declining by 20.1% to $30.2 million in 2015 from $37.8 million in 2014.
– Canada accounted for the largest share of U.S. imports by partner country at 14.9%, followed by Brazil (13.7%) and Korea (12.5%).
– The U.S. imported 14.7 million metric tons of flat products in 2015, accounting for 42% of total steel mill imports, followed by long products at 7.4 million metric tons, or 21% of total imports.

According to the Steel Manufacturers Association, through November 2015, China exported over 100 million metric tons of steel to the world, already exceeding a record-setting 2014 at 94 million metric tons

There are four key factors that could drive steel companies’ 2016 performance:

– How the Chinese slowdown plays out in 2016
– The trend in US steel demand, including service center buying activity
– Movement in U.S. spot steel prices, as well as contract steel price movement
– The impact of anti-dumping duties on US steel imports