The U.S. Department of Commerce just set import duties on some Chinese steel products of as high as 235%. That's great news for steel makers like AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X), but it won't be enough to help save these old-line producers from further pain.
How much steel?
According to AK Steel, foreign imports recently accounted for about a third of the U.S. market. That's a huge number, and the impact has been pretty severe. The company's CEO, James Wainscott, provided a powerful example during the steel maker's third-quarter conference call:
When we acquired Dearborn Works in September of 2014, benchmark hot rolled pricing was about $650 per ton. Since our acquisition, with the import pressures, that price has declined by about $250 per ton, or nearly 40%, to right around $400 per ton. And at this point, our current prices for hot rolled coil are -- well they're very near their 15-year low levels, and that, ladies and gentlemen, is simply incredible."
Pricing pressure from imports basically turned a potentially good $700 million acquisition into a definitively bad one. U.S. Steel's CEO Mario Longhi is no more pleased, explaining during his company's conference call that, "We have continued our aggressive efforts to mitigate the impact of illegally imported dumped and subsidized steel in the United States." But he notes that dealing with the issue is a progression, which is why 235% tariffs against China aren't enough.
What about the rest?
China is the largest producer of steel in the world. And as the country's economy has slowed down, its capacity has vastly outstripped demand. That's led Chinese producers to sell into global markets. By some accounts, China's exports are nearly as large as Japan's steel production -- Japan is the second largest steel producer in the world. So, China is a huge issue, but hitting China hard on the trade front isn't the full answer.
That's because Chinese steel is exported around the world, not just to the U.S. market. So the import duties will likely shift Chinese exports into other markets. And those markets are likely to start sending their steel to the United States in response to their own Chinese import pain. But the recent trade win isn't as robust in dealing with other countries. For example, India faces only about 8% in duties, South Korea a little over 1%, and Italy around 13%. That's not likely to be enough to stop continued exports to the United States from those markets if they get flooded with Chinese steel.
The real problem
But, to be honest, this whole issue is something of a symptom more than the core problem for AK Steel and U.S. Steel. The really big issue for these mills is that they use older blast furnace technology, which is expensive. That is a big part of the reason AK Steel has been bleeding red ink for three years, with 2015 shaping up to be year four in the streak. U.S. Steel has lost money in five of the last six years (it turned a profit last year), but this year will likely make it losses in six out of seven years.
Competitors using electric arc furnaces, which are cheaper to run, haven't fared nearly as badly. And while these more-modern mills are being hit, too, they aren't losing money like the older blast furnace mills. In the end, then, the heavy duties placed on China, the main source of the steel industry's global oversupply, is a good first step. But it isn't enough because of the industrywide impact China is having. It is, as U.S. Steel's Longhi said, a process.
If you are a contrarian investor looking at the down-and-out steel industry for ideas, there are some good options, but AK Steel and U.S. Steel aren't among them. Not only are imports hitting the industry hard, but this pair are positioned poorly to handle the blow. This U.S. steel industry win was, indeed, good news, but not nearly as good as this pair hoped and, perhaps, needed.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.