US Raw Steel Output Slumps as Demand Wanes on Coronavirus

Anindya Barman

U.S. raw steel production is on a downward spiral as the coronavirus pandemic has led to a slump in demand for steel across key end-use markets, including automotive. The demand slowdown has forced domestic steel mills to curtail production with capacity utilization dropping to a multi-year low.

Weekly Production Takes a Hit as Utilization Shrinks

Per the latest American Iron and Steel Institute (AISI) weekly report, domestic raw steel production clocked 1,534,000 net tons for the week ending Apr 4, reflecting an 8.1% drop from production of 1,670,000 net tons for the week ending Mar 28. Reported weekly production also tumbled 18.9% from production of 1,892,000 net tons logged for the same period a year ago. This follows a 12.7% year-over-year decline and 9.8% week-over-week drop for the week ending Mar 28.

Capacity utilization — a key metric in the steel industry — was 68.5% for the reported week, well below the key 80% level (the minimum rate required for sustained profitability of the industry). Capability utilization rate declined from the previous week’s reading of 71.6% and also dropped from 81.3% a year ago, per the AISI.  

Notably, the 25% tariff on steel imports, which the Trump administration had levied under Section 232 of the Trade Expansion Act of 1962, largely helped the U.S. steel industry capacity break above 80% in 2018. U.S. steel mills operated near or above that level for most part of 2019.

Meanwhile, by-region, output from Great Lakes fell roughly 10% on a weekly basis to 549,000 net tons in the reported week. Mills in the North East produced 194,000 net tons of raw steel, down around 4% from the previous week. Production in the Southern region dropped 7% to 602,000 net tons in the reported week. The Midwest region produced 139,000 net tons of raw steel, down 10% from a week ago. Output went down 17% in the Western region to 50,000 net tons.

Year to date (through Apr 4), raw steel production on an adjusted basis was 25,067,000 net tons at a capability utilization rate of 79.4%, down 2.7% from 25,773,000 net tons recorded in the same period a year ago at a capability utilization rate of 81.5%, the AISI noted.

Falling Demand, Steel Prices Taking Toll

Coronavirus has dealt a heavy blow to the U.S. steel industry. The lethal outbreak, which has so far claimed more than 82,000 lives and infected more than 1.4 million people in at least 180 countries, has rattled global stock markets and put the world economy on the edge.

 

The pandemic has dampened recovery in the U.S. steel industry which bore the brunt of a sharp decline in domestic steel prices and damaging impacts of the trade war last year.

Shares of U.S. steel companies gained some ground toward the end of 2019 on a recovery in domestic steel prices and the de-escalation in trade tensions following the announcement of the preliminary U.S.-China trade deal. However, the coronavirus-induced sell-off has triggered a bloodbath in steel stocks this year.

Shares of major American steel makers such as United States Steel Corp. X, Nucor Corporation NUE and Steel Dynamics, Inc. STLD have tanked roughly 43%, 34% and 33%, respectively, year to date.

United States Steel and Steel Dynamics currently carry a Zacks Rank #4 (Sell), while Nucor has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Steel Producers industry has also lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector so far this year. The industry has declined 41.7% over this period compared with the S&P 500’s decline of 17.1% and broader sector’s fall of 30.1%.


 

Meanwhile, U.S. steel prices have come under pressure of late amid the virus crisis. The benchmark hot-rolled coil steel (HRC) prices have been on the downswing over the past few weeks on concerns over wider economic fallout from the fast-spreading pandemic in the United States and worries over demand slowdown amid production shutdowns by automakers.

Major U.S. automakers have temporarily shuttered production in North America in an effort to limit the spread of coronavirus. Detroit’s big three automakers Ford Motor Company F, General Motors Company GM and Fiat Chrysler Automobiles N.V. FCAU have shut all their North American factories amid the intensifying virus crisis.

Ford recently said that it will not restart its North American operations on Apr 14 as previously planned as the outbreak continues to spread. Its factories will remain closed until further notice. Fiat Chrysler also recently said that it plans to reopen of its North American plants on May 4. The company had earlier stated that it intends to resume production on Apr 14. There has been no official confirmation from General Motors so far. The effects of shutdowns continue to roil the U.S. steel industry.

Moreover, demand for steel in the energy space is likely to slow amid plunging crude oil prices due to the price war between Russia and Saudi Arabia, surging supply and ebbing demand amid the coronavirus-induced disruptions. Oil prices have halved this year as coronavirus dented demand for crude. Some of the major energy companies have also slashed their capital spending in the wake of the oil price rout.

In response to falling oil prices and high import levels, United States Steel recently said that it will indefinitely idle all or most of Lone Star Tubular Operations and Lorain Tubular Operations starting late-May. A few other steel makers have also idled operations in the wake of falling demand across major end-markets.

Moreover, a slowdown in steel demand in China, the world’s top consumer, is a major concern for the steel industry. Coronavirus has pushed China's economy to the brink. The pandemic has slowed down activities in construction (a major steel end-use market) in the country. Construction works in China came to a grinding halt in February as the country struggled to stem the spread of the virus. While activities picked up in March, they remain a long way from normal.

Coronavirus has also ravaged the automobile sector in China. The world's biggest automotive market suffered a 79% plunge in car sales in February as the coronavirus-induced panic impeded new purchases. Automakers in the country are operating significantly below their production capacity as shortage of workers and parts is delaying a recovery.

While China is gradually crawling out of the worst of the coronavirus impact, a material recovery in the demand environment for steel is not expected anytime soon. Business activities in China are likely to remain far from normal over the short term as constraints such as shortages of labor and supply chain delays continue to hamstrung the world’s second-largest economy.

Free: Zacks’ Single Best Stock Set to Double

Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.

This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.

See 5 Stocks Set to Double>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Ford Motor Company (F) : Free Stock Analysis Report
 
United States Steel Corporation (X) : Free Stock Analysis Report
 
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
 
General Motors Company (GM) : Free Stock Analysis Report
 
Nucor Corporation (NUE) : Free Stock Analysis Report
 
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.