Is this a Fight that U.S. Steel Can't Win?http://www.fool.com/investing/general/2014/02/19/is-this-a-fight-that-us-steel-cant-win.aspx Reuben Brewer
February 19, 2014
Steel makers have been complaining that the U.S. market is the dumping ground for foreign steel makers. The typical route to deal with this is a trade case, which is the course the industry is taking. However, a changing world may finally be catching up to steel, and AK Steel (NYSE: AKS) and Allegheny Technologies (NYSE: ATI) could turn out to be the canary in the coal mine.
Too much steel
That's a problem because imports have kept U.S. steel makers at relatively low utilization levels. Owning and operating steel mills costs a lot of money. Running at 80% of capacity costs just about as much as running at 90% capacity. What changes is a steel maker's profit margin, meaning there's less cash hitting the bottom line for every ton produced. That's a double whammy, earning less per ton as a result of lower sales.
A chief culprit is China, which Nucor's Ferriola says has at least 300 million tons of, "excess steel capacity." AK Steel CEO James Wainscott was even more specific when he stated that, "we've seen America become the world's dumping ground for electrical steel." That's why AK Steel and fellow electrical steel maker Allegheny Technologies are working on trade cases that would put sanctions on those found to be dumping this specific type of steel.
A changed world
Therein lies the risk. ABB and GE can simply move production to other countries, specifically those with which the U.S. has free trade agreements, allowing them to continue buying foreign electric steel. There would be little impact on their businesses, but such shifts would materially reduce AK Steel and Allegheny's U.S. customer base.
But that's not the only problem. Smaller customers that can't move production will be forced to buy price-protected, and p