Increased steelmaking capacity in US South may help cap price hikes

Hot-rolled steelmaking capacity in the US South increased by nearly a quarter in a two-year period and is still growing, which sources believe will help to keep prices relatively low

“We do not see recent price increases as sustainable,” Fastmarkets analyst Paolo Frediani said. “Increasing capacity in the South will contribute to balance the market.”

For February, the US South HRC index averaged $41.36 per cwt, while the US Midwest index averaged 4.50% higher, at $43.22 per cwt.

South capacity growth is ongoing

Hot strip mill capacity in the US South has increased by 23.85% in a two-year period - to 20.93 million tonnes (23.07 million short tons) per year in 2023 from 16.90 million tpy in 2021, according to data from the Association for Iron and Steel Technology (AIST).

The increased capacity comes from just two mills coming online - Steel Dynamics Inc’s (SDI) Sinton, Texas greenfield mill and an expansion at US Steel’s Big River Steel.

The US South HRC index has trended lower than its Midwest counterpart since launching on January 4, and sources have consistently pointed to increased steelmaking capacity in the South as a factor that has kept regional prices comparatively competitive.

That regional capacity growth is still ongoing, which could allow southern buyers to continue to enjoy lower average steel prices and slower market absorption of price increase announcements.

“Once the market will iron out some recent imbalances, prices will have to decline from current levels, and we are bearish for the remainder of 2023,” Frediani said. “New capacity will obviously play an important role in driving the market down.”

SDI’s Sinton mill is still ramping up and should grow more productive throughout 2023, Mark Millett, SDI’s chairperson and chief executive officer, said during the company’s fourth quarter and full fiscal year 2022 earnings call on January 26.

Big River is expanding as well, adding two new electric-arc furnaces that will have an annual capacity of three million short tons upon completion, which is targeted for 2024.

Buyers in the South have expressed stronger resistance to February’s slew of steel mill price increase announcements than their Midwest counterparts, but they have still seen prices rise considerably in a short amount of time.

Mills have cited insufficient supply when justifying the increases to southern buyers, a situation that could ease up when Sinton increases productivity and Big River expands.

“‘Outage’ is the big word right now,” a distributor source said. “It’s their excuse [for the ongoing price hikes].” Further, he added, high asking prices may be a tactic the mills are using to “stop the feeding frenzy” while they catch up on backlogged orders.

differentials between southern and midwestern prices can only expand so much before they get arbitraged away

Still, “differentials between southern and midwestern prices can only expand so much before they get arbitraged away,” Frediani noted.

Indeed, some Fastmarkets sources already report buying from mills in both regions. Further, although AIST data shows a 0.41% decline in Midwest hot strip mill capacity from 2021 to 2023, that region remains the dominant buyer of flat steel products and will be getting increased capacity in the next two to three years as well.

Nucor aiming new capacity at Midwest

Nucor’s planned Mason County, West Virginia sheet steel mill, which will have an annual capacity of three million tons per year, is in the Southeast as defined by the US Census Bureau. However, the location was primarily selected to serve customers in the Midwest and Northeast, which consume half the sheet steel in the country, Leon Topalian, Nucor’s chairperson, president and chief executive officer, said in a press release issued on February 23.

Nucor expects an approximate net cash outlay of $3.1 billion - up from the $2.7 billion initially announced in September 2021 - due to factors including inflation, the acquisition of additional property and equipment, and expanded port and rail infrastructure requirements, according to the release.

The mill has received all required state permits and Nucor aims to secure federal permits in the spring of 2023, the release said. Construction is expected to take two to three years once all permit approvals have been received, it added.

While that additional capacity is expected to come online too far into the future to determine its impact, there is not enough demand in the short-term to utilize even existing capacity, according to Frediani.

“Already now there is spare capacity in the system,” Frediani said. “As recently as this month US Steel said it was planning to keep Gary BF No8 temporarily idled. The most recent figures on US crude steel capacity utilization were below 75%.”

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