China's Miscalculated Exuberance Could Be Great for American Steel

You need steel to grow a country, that's why China has been making so much of it in its various incarnations. However, just like so many other areas, China has overshot on the supply side, thus pushing steel prices lower across the globe. The nation's leaders are now looking to cut back, which would be great news for U.S. players like Nucor (NYSE: NUE  ) , AK Steel (NYSE: AKS  ) , Steel Dynamics (NASDAQ: STLD  ) , and United States Steel (NYSE: X  ) .

The U.S. steel market
During Nucor's third quarter conference call, CEO John Ferriola noted that "...the U.S. steel industry's capacity utilization rate remains mired well below 80%" and that "...imports of steel into the United States are on pace to again exceed 30 million tons this year or approximately double the 2009 level."

The U.S. steel industry is "among the lowest-cost producers of steel in the world," according to Nucor, so many in the industry question how foreign steel makers make any money selling their wares here? That's particularly true since they have to add on the cost of shipping steel from their home markets. It's no wonder that Nucor, AK Steel, and U.S. Steel all talked about the import issue during their third quarter calls.

However, the term they used wasn't import—it was dumping. That's when a company sells steel at less than it costs to make. AK Steel CEO James Wainscott, for example, said that "we've seen America become the world's dumping ground for electrical steel." Although he confidently proclaims that AK Steel "...can compete with any steelmaker anywhere, anytime," he says his company "cannot and... should not have to compete with unfairly traded imports."

Both AK Steel and Nucor highlight government subsidizing abroad as a primary reason behind dumping since it allows unprofitable production to continue operating. A chief culprit is China, which Nucor's Ferriola says has at least 300 million tons of "excess steel capacity."

And U.S. Steel's CEO, Mario Longhi, highlighted the August 2013 ruling out of the International Trade Commission saying that the U.S. steel industry "had been or was likely to be injured by unfairly traded imports" of steel used in the oil and natural gas industries. That company, and many others, are waiting for the Department of Commerce to "determine preliminary countervailing duties on the subject countries..."

A bunch of complainers?
It's easy to push off this type of talk as the complaints of companies finding it hard to compete in an increasingly global world. However, Chinese trade groups have commented on the steel industry's overcapacity and poor profitability in their country. And the Chinese government has been looking to curtail production. That makes the complaints of Nucor, U.S. Steel, and AK Steel seem a little more believable.

China's hard look at its steel industry has included examining the benefits afforded to steel mills that haven't installed equipment to help reduce harmful emissions. Since pollution is a growing concern in China, that focus alone could help ease the oversupply situation. Less Chinese steel would clearly be welcome news on these shores.

And reduced Chinese production, or even just the expectation of it, could help the recent round of U.S. steel price hikes stick. Steel Dynamics, for example, announced it would up the price it charges for rebar in November, a price change that Nucor and others were also making. And more recently Steel Dynamics announced plans to increase its price for steel beams. Again following the lead of Nucor.

Although increasing input costs are behind the price hikes, they won't hold if imports from foreign companies are being sold below cost. And without price hikes, steel makers will see margins get pinched if they can't offset their increasing costs.

A steel eye on China
The leaders of U.S. Steel, Nucor, AK Steel, and Steel Dynamics are watching the Chinese steel industry and so should you. There's plenty of demand in the U.S. market that could be filled by U.S. companies if imported steel were more expensive. Monitor fourth quarter conference calls for an update here and keep an eye on the news out of China to see if industry capacity there really does start to fall—U.S. steel makers will be key beneficiaries.  

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  • Report this Comment On January 03, 2014, at 11:04 AM, pakrat13 wrote:

    There are two problems with the Chinese scenario:

    First, what happens to the “growth” in steel that China has been experiencing? False growth or not; it has been one of the reasons China has risen to and continued to be a global economic power. If the Chinese steel production is reduced significantly, the effect it will have on the global steel market will be massive. One of the reasons the global steel market has remained so [relatively] stable for the past few years has been the Chinese presence.

    Second, if you assume (for a moment) that China is effectively removed as a primary contributor to the North American steel market, then get ready – things are going to get more than a little chaotic. North American steel producers have been resting on their laurels and blaming the “evil” Chinese for all their woes for far too long. It is now the year 2014, and yet the domestic producers continue to attempt to apply the business practices and methodologies of the 1950’s. Yes consumers (OEM’s, traders, and service centers) need the domestic mills. But what we don’t need is the domestic mills to be left unfettered by actual competition; foreign or domestic.

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Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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