New steel coil capacity may shrink record-high US prices

The prospect of more than 5 million tons of additional flat-rolled steel production starting up in the United States by the end of this year has convinced some market participants that the current run of all-time record-high sheet prices must come to a screeching halt by summer.

New electric-arc furnaces (EAFs) due in the second half of 2021 – plus the restart of older capacity and the anticipated arrival of more imported steel by June – will likely doom the pricing rally that led hot-rolled coil and other sheet products to surge to their highest levels in history during January, some sources said. 

“This flat-roll market will not last,” one steel trader said. “There is going to be a flood of material by the fall. These mills can’t control it.”

On top of the new steelmaking capacity coming online this year, another almost 6 million tons will be added in mill projects that have been announced for 2023 or thereabouts.

Big River Steel, now fully owned by U.S. Steel Corp, started up its second EAF in Arkansas in November 2020. Steel Dynamics Inc (SDI) will start its coating and paint lines in Sinton, Texas, in the second quarter of 2021 – en route to a full start-up of its new steel mill later in the year.

An expansion at the Nucor Gallatin sheet mill in Kentucky is scheduled to go into production in the second half of this year. 
While SDI has said it intends to aim some of its Sinton volumes at the nearby Mexico market, competition is about to get more crowded south of the border too. Ternium plans to start up a new hot-rolling mill in Mexico in July 2021. ArcelorMittal is opening a new hot-strip mill in Mexico this year as well.

Prices at the US sheet mills lurched upward starting in August 2020. After the Covid-19 pandemic triggered business closures in the spring, steelmakers idled some production in anticipation of economic stagnation, lower steel demand and operational hazards. The largely unexpected result was a flurry of orders for automobiles and construction materials while Americans migrated out of urban centers, with most US manufacturing able to continue operating while adjusting to health protocols. 

After weakening to $21.95 per hundredweight – its lowest point in the second half of 2020 – Fastmarkets’ daily steel hot-rolled coil index, fob mill US launched into a six-month rally beginning July 23. The HRC index notched a gain of 170% in its ascent to an all-time high of $59.23 per cwt on Thursday February 4.  

A midwestern sheet consumer said service centers and other customers have already slowed their buying in response to the historic price run-up.

In addition to the new capacity under development, some of the idled capacity has – or is about to – come back online. Restarts at Stelco and JSW Steel Ohio and production adjustments at Cleveland-Cliffs properties will result in a net gain of sheet output in the Great Lakes region. 

The midwestern sheet consumer said the resurrected production, along with the new start-ups and moderating demand, could begin to pressure prices even before the summer. 

“Availability of the additional tonnage could be a factor,” this consumer source said. 

Timna Tanners, equity research analyst for metals and mining at Bank of America Securities, asserts that the added capacity certainly will be a factor. Prior to Covid-19, Tanners likened the approaching wave of new supply to an end-times epoch of final judgment of the domestic steelmakers – especially those with high operational and legacy costs. While the pandemic dynamics instead catalyzed a steel shortage in recent months, Tanners has not changed her view that the supply/demand equation is about to turn ugly for US producers. 

“We still think there will be too much supply, and we think in the second half of the year this market will be swimming in sheet in particular,” Tanners told Fastmarkets. 

The habits of Americans during the pandemic provided a shot in the arm to domestic steel suppliers, but Tanners expects it to fade out. If people suddenly needed a car or splurged on a recreation vehicle, they probably already bought one. If they spent time catching up on odd jobs around the house, they probably already finished those. If they furnished a new house with home appliances or upgraded their kitchens and lawn machinery at their existing residence, they will not need to do that again for years. 

If vaccinations do their job and the Covid-19 virus emergency subsides, Americans are poised to divert discretionary income instead toward vacationing, restaurant dining and concerts.

“People have been spending on home improvements because they can’t go to the movies,” Tanners said. “We think that automotive demand falls off into the second half of the year.”

Through the new year, manufacturers have stayed busy and mostly accepted the higher steel prices. Now, market participants detect a shift as original equipment manufacturers (OEMs) and their customers have successfully coped with illnesses, lockdowns and the supply-chain disruptions of 2020. 

“I believe we are beginning to see the end of ‘endless’ demand and the backlogs at OEMs from Covid downtime,” a southern distributor said. The aggressive activity to catch up with pent-up demand in the second half of 2020 now “is begging to level out just as we are getting news of capacity coming back online.”

What worries market participants most is a pricing plunge resembling what occurred in 2008. A steep decline in inventory values can threaten companies’ profitability and creditworthiness, and damage the careers of buyers who shoulder the blame for loading up on stock at the wrong time.

Some market participants and mill sources are less concerned this time, however. They point to strong demand all the way downstream in the supply chain, still-thin inventories, Section 232 import curbs, better corporate discipline regarding production levels and less debt risk in the industry than preceded the 2008-09 shock. If government stimulus packages end up debasing fiat currencies, there could be a rally in the value of commodities and basic materials. 

A second steel trading source, familiar with Asian trade flows, said ferrous scrap trends upstream also could provide additional support to steel prices this year, noting that China could boost scrap buying around the same time that the new US EAF capacity begins melting in earnest. 

If scrap prices do strengthen, that might serve as a check to unfettered steel sheet output, Tanners said. 

“You can make a case that if the scrap price remains higher, then the mini-mills will be more disciplined and produce based on their cost of production,” Tanners said. 

The optimists also salivate at the prospect of a large federal infrastructure investment now that President Joe Biden has taken office. Tanners characterized the infrastructure scenario as “a 2023 story” – not arriving in time to ward off the steel oversupply reckoning.

Thorsten Schier in New York contributed to this report.

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