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US Steel Imports Drop in February, Coronavirus Casts a Shadow

Anindya Barman

U.S. steel imports tumbled in February on a monthly comparison basis and were also down year over year for the first two months of 2020 – according to the latest American Iron and Steel Institute (AISI) report.

The association of North American steel makers noted that total and finished domestic steel imports dropped 52.2% and 18.4% from the previous month, respectively, in February to roughly 1.5 million net tons and 1.34 million net tons, respectively.

Total and finished domestic steel imports fell 21.3% and 28.7% year over year, respectively, year to date through the end of February 2020. The AISI noted that these figures are based on preliminary Census Bureau data.

Finished steel import market share was estimated at 15% in February, down from 17% a month ago. For the first two months of 2020, finished steel import market share was estimated at 16%.

For 2020, annualized total and finished steel imports are expected to be 27.9 million net tons (flat year over year) and 18 million net tons (down 14.7%), respectively, AISI noted.

According to AISI, the biggest offshore suppliers for February were South Korea with 158,000 net tons (down 13% from January), Turkey with 73,000 net tons (up 44%), Japan with 69,000 net tons (down 9%), Germany with 52,000 net tons (up 7%), and Brazil with 37,000 net tons (down 58%).

Steel mills products that showed a significant decrease in imports on a monthly comparison basis in February include ingots and billets and slabs (down 89.4%), heavy structural shapes (down 57.2%), oil country goods (down 33.6%), cold rolled sheets (down 31.8%) and line pipe (down 39.4%).

The decline in imports primarily reflects the impact of the 25% tariff on steel imports, which the Trump administration had levied in 2018 under Section 232 of the Trade Expansion Act of 1962. The coronavirus pandemic also to some extent contributed to the drop. The AISI, earlier this month, reported that steel import permit applications for February dropped 47.5% from January permits. The decline in permits appears to partly reflect the impact of the virus outbreak. The fast-spreading virus has so far infected more than 470,000 people globally and rattled stock markets around the world on worries over broader economic impacts from the contagion.

 



 

Imports Falling Under the Weight of Section 232 Tariffs

The steep tariffs on steel and aluminum imports, which were imposed defying a wave of criticism and threats of counter-measures from major foreign trade partners, have made imports more expensive.

The tariffs are aimed at rescuing domestic steel and aluminum industries, which had long been reeling under the onslaught of cheap imports and suffered significant reduction in production and employment. They are, in particular, targeted at countries with which the United States has significant trade deficits.

While the tariffs on steel imports took a heavy toll on certain major industries including automotive that are key consumers of steel, they provided the long-struggling U.S. steel industry a much-needed shot in the arm. The tariffs boosted production capacity of U.S. steel producers amid lower imports. They also helped U.S. steel industry capacity break above the important 80% level – the minimum rate required for sustained profitability of the industry.

Notably, U.S. steel imports dropped roughly 15% in 2019 as a result of the tariffs despite complete exemptions of Canada and Mexico, two major sources of steel imports to the United States. In May 2019, the United States had reached a deal to lift steel and aluminum tariffs from Canada and Mexico. The deal paved the road for the ratification of the new United States-Mexico-Canada Agreement (USMCA) to replace the North American Free Trade Agreement (NAFTA).  

However, leading U.S. steel industry groups have expressed worries about a recent U.S. Customs and Border Protection (CBP) notification that importers may be allowed additional days for payment of estimated duties, taxes and other fees on a case-by-case basis due to the crisis wrought by the coronavirus disruptions, per an AISI report. They have communicated their concerns in a letter to the CBT that “any efforts to weaken the timely collection of critical import duties – trade remedy duties (antidumping and countervailing duties), as well as Section 232 duties – is extremely troubling to the domestic steel industry.”

Coronavirus Dampens U.S. Steel Industry’s Prospects

Coronavirus has dealt a fresh blow to the U.S. steel industry, after a rough 2019. The U.S. steel industry bore the brunt of a sharp decline in domestic steel prices in 2019. The slump in steel prices and lower demand for the commodity amid the global slowdown hurt bottom lines of U.S. steel companies through the first three quarters of 2019. However, the U.S. steel industry witnessed some recovery in late 2019 on the back of an uptick in domestic steel prices.

Driven by consecutive price hike actions by major U.S. steel mills and supply-side actions, steel prices gained some traction in December. Shares of U.S. steel companies also gained some ground toward the end of 2019 on a recovery in prices, after getting slammed for most part of the year. The de-escalation in trade tensions due to the announcement of the preliminary U.S.-China trade deal also provided a boost to shares of American steel makers. Most of the U.S. steel stocks ended 2019 in the positive territory.

However, the lethal coronavirus outbreak has dampened the slow recovery in the U.S. steel industry. Steel prices have again come under pressure over the past couple of months amid the virus crisis. The benchmark hot-rolled coil steel (HRC) prices retreated this week amid concerns over the fast-growing coronavirus pandemic in the United States.

U.S. steel stocks have also gotten hammered amid the pandemic. Shares of major American steel makers such as United States Steel Corp. X, Nucor Corporation NUE, Steel Dynamics, Inc. STLD and have cratered roughly 49%, 45% and 42%, respectively, year to date.

U.S. Steel and Steel Dynamics currently carry a Zacks Rank #3 (Hold), while Nucor has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Slowdown in steel demand in China, the world’s top consumer, amid a faltering domestic economy is a concern for the steel industry. Coronavirus has taken a heavy toll on China.

The pandemic has slowed down activities in the construction space, a major steel end-use market. Coronavirus is also hurting the automobile sector, another major market. Notably, automakers in China are operating significantly below their production capacity as shortage of labor and parts are delaying a recovery.

U.S. automakers have also announced production shutdowns in North America. Detroit’s big three automakers Ford Motor Company F, General Motors Company GM and Fiat Chrysler Automobiles N.V. FCAU recently said that they are shutting down all their North American factories through Mar 30 following pressure from the United Auto Workers amid the coronavirus crisis. According to a Reuters report, they may extend their shutdown into April as the outbreak continues to spread. Production shutdowns will impact steel demand.

Meanwhile, slumping crude oil prices due to price war between Russia and Saudi Arabia, surging supply and ebbing demand amid the coronavirus-induced disruptions are expected to lead to a slowdown in demand for steel in the energy sector. Some of the major energy companies have also slashed their capital spending in the wake of the oil price crash.

In response to plunging oil prices and high import levels, U.S. Steel recently said that it will indefinitely idle its tubular operations in Ohio and Texas by the end of May. The company is witnessing challenging conditions in its Tubular business as oil prices remain considerably under pressure and rig counts continue to be low.

As such, softening demand across major end markets spells problems for the U.S. steel industry. The current weak demand situation also does not look supportive for higher U.S. steel prices over the near term, thus limiting prospects of a material rebound in American steel stocks.

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