The U.S. Steel is Depressed

The backbone of manufacturing, steel is a strategic industry essential to America’s economic growth and stability. It was founded by multi-faceted industrialist Andrew Carnegie, who, along with Thomas Edison (electricity), and John D. Rockefeller (finance), constituted the basis of America’s eventual economic superpower status after World War II.

The U.S. steel industry operates more than 100 steelmaking and production facilities, producing 98 million tons in steel shipments valued at $75 billion in 2014. The steel industry directly employs about 150,000 people in the United States, and it directly or indirectly supports more than one million U.S. jobs. Adjusted year-to-date production through November 21, 2015 was 79,228,000 net tons, at a capability utilization rate of 71.9 percent.

In North America alone, more than 80 million tons of steel are recycled or exported for recycling each year. More steel is recycled annually than paper, plastic, aluminum, and glass combined. This is because steel scrap is an essential raw material in making new steel. The overall recycling rate of steel is 81 percent based on the most recent data compiled by the Steel Recycling Institute (SRI) through 2013.

While the strong automobile and improving construction sectors continue to support demand, the steel industry is currently facing three major headwinds: falling prices, economic slowdown in China and foreign steel import 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. American steel producers are still struggling to defend themselves against an influx of cheap steel imports from foreign manufacturers.

China built the biggest steel industry in the world in order to support rapid modernization and infrastructure-building. Now, China’s economy is slowing, and steel mills are left with massive overcapacity. So the government has funneled direct and indirect subsidies to the industry to keep mills from closing and laying off workers. China’s steel exports are impacting markets around the world, with the big U.S. steel players increasingly feeling the pain. With more steel being made in China than is being used in China, the country has lately been sending its steel wares to other parts of the world.

Steel prices and margins remain under pressure from exceptionally high levels of imports that continue to flood the domestic market. American steel makers including Nucor Corporation (NYSE: NUE), United States Steel Corp. NYSE: (X), AK Steel Holding Corporation NYSE: (AKS), Steel Dynamics Inc. NYSE: (STLD) and ArcelorMittal US NYSE: (MT), have suffered heavily due to high levels of imports, reflected by decline in orders, idling of mills and layoffs across the nation.

Nucor Corporation’s steel mills ran at 69% of their capacity through the first nine months of the year. Steel Dynamics, noted that its utilization rate fell from 87% in the second quarter to 82% in the third. These companies have been pushing the U.S. to fight back on imports, but it’s a slow process, and importers often find a way around the roadblocks that do get imposed. For example, a Chinese company could export to a country that hasn’t been hit with trade restrictions, thus forcing that nation to export steel products to the U.S. market to offset the flood of Chinese steel into its home market. Lower-priced, government-subsidized foreign steel draws American buyers and makes it more difficult for U.S. companies like to compete.

Chinese manufacturers enjoy a better cost structure when the Chinese yuan depreciates in comparison to the U.S. dollar. Chinese steel producers buy raw materials and pay for labor using the yuan, but sell the products in other markets such as the U.S. for higher valued currencies such as the dollar. In the first 8 months of this year China’s global steel exports surged 27% to 72 million tons in the first nine months of fiscal year 2015. China is on track to exceed 100 million tons, which is greater than the total U.S. steel production last year.

On June 3rd, 2015 six American steelmakers including U.S. Steel filed three trade complaints gainst anti-corrosive steel from China, South Korea, India, Italy and Taiwan. As a result on November 3rd, they received a preliminary ruling on the first as the U.S. Department of Commerce established preliminary duties of up to 236% on imports of corrosion-resistant steel from China. The tariff goes into effect immediately and will be set for five years if a final ruling in favor of the duty is made in January. The decision may suppress further shipment.