China Stimulus Could Ease U.S. Steel Companies' Concerns

Some of the concerns raised by U.S. steel companies over cheap imports could be eased if Chinese policymakers announce measures to stimulate the world's second-largest economy.

Apr 1, 2014 at 12:00PM

Executives from United States Steel Corporation (NYSE:X), Nucor Corporation (NYSE:NUE), and a few other U.S. steel companies recently met with members of the Congressional Steel Caucus to highlight the threat of cheap imports. The concerns have been raised by rising U.S. steel imports since the start of this year. In February, U.S. steel imports once again rose sharply and could continue to surge, especially from China, where an economic slowdown has hurt domestic demand for steel. Indeed, cheap imports from China are probably the biggest worry for U.S. steel companies. However, those concerns could be eased if China announces stimulus measures in the wake of a slowing economy.

U.S. steel companies raise concerns
Executives from several U.S. steel companies told members of the Congressional Steel Caucus to reform a number of government policies on trade, energy, environment, and infrastructure in order preserve jobs in steel and other manufacturing sectors. The executives highlighted the challenge faced by the U.S. steel industry from unfairly traded imports.

Mario Longhi, CEO of United States Steel, said that all steel companies are asking for is a level playing field. Nucor CEO John Ferriola noted that his company is doing its part to grow the economy by investing in the U.S. and creating jobs, and the government needs to do its part by backing up U.S. industry with strong trade enforcement.

U.S. steel industry has been hoping for a rebound as the domestic economy continues to recover. In fact, expectations of a rebound had sparked a rally in steel stocks in the second half of 2013. In the second half of 2013, shares of Nucor gained over 23%, while shares of United States gained more than 68%. AK Steel (NYSE:AKS) surged nearly 170%. However, the performance has been disappointing in the first three months of 2014, with shares of all three companies down sharply year to date.

Steel stocks have been pushed lower as the outlook for the industry has dampened amid concerns over rising imports since the start of this year. According to preliminary data from the Commerce Department, steel imports rose 1.4% on a month-over-month basis in February. For the first two months of 2014, steel imports rose nearly 26% on a year-over-year basis. It is not surprising, then, that U.S. steel companies are worried.

In fact, imports were one of the reasons cited by Nucor when the company recently provided weak guidance for the first quarter.

China the big worry
The biggest threat to the U.S. steel industry is from cheap Chinese steel imports. As I have noted in previous articles, Chinese steel has been trading at a significant discount to steel produced in the U.S. With the Chinese economy seeing a slowdown and the country's policymakers making an effort to cool down the property market, steel imports from China could rise significantly.

Chinese steel imports to the U.S. rose over 22% on a year-over-year basis in February, according to a government report. That could rise even more as the Chinese economy continues to slow down, as recent manufacturing data once again showed. But, the slowdown also gives some hope to U.S. steel companies as Chinese policymakers could push ahead with infrastructure investment to stimulate the economy.

Stimulus measures could slowdown Chinese steel imports
Chinese policymakers have been focused on rebalancing the world's fastest growing major economy from investment and export to consumption. This shift is the major reason for the slowdown in the Chinese economy, and it explains why policymakers have so far not announced any measure to stimulate the economy. However, in the past week, there has been speculation that Chinese policymakers might take some steps to stimulate the economy.

Indeed, if there is a threat of a sharper-than-expected slowdown in the economy, then it is likely Chinese policymakers might announce measures to stimulate growth. The speculation has been fueled by comments from China's Premier Li Keqiang on Friday, who said policymakers were ready to support the cooling economy. If any stimulus measures are announced, they are likely to be in the form of infrastructure investment, which should boost domestic demand for steel. This could possibly slow down U.S. steel imports from China and ease some of the concerns of U.S. steel companies.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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