A Rising Tide Lifts All Steel Markets — But Not All to the Same Degree

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The steel market is doing rather well, particularly in the U.S., but an improvement in demand is helping lift earnings in Europe, too.

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The phrase “a rising tide lifts all boats” is probably true of steel companies — it is also true to say it doesn’t lift all boats equally.

ArcelorMittal, part way through a major re-structuring program to re-focus the business on value add growth areas and exit less attractive market segments, is doing rather well judging by both the share price and recent reporting.

The Northwest Indiana Times reported last week that the world’s largest steelmaker grew its second-quarter profit by 19% to $1.3 billion, lifting its first-half profit to $2.3 billion (compared to just $696 million during the same period in 2016).

Demand in the U.S. — though it has been impacted by imports, the firm claims — was high, as the firm shipped 21.5 million tons of steel in the second quarter, a 2% increase over the first quarter. So far this year, however, its steel shipments in H1 declined by 2.4% to 42.5 million tons compared to the year before.

So, margins are up but volumes are down. North American shipments dropped 3.4% to 5.4 million tons and crude steel production fell 7.3% to 5.8 million tons, the Northwest Indiana Times reports. Yet, with sales prices up 5.7%, sales values were up 3.3% to $4.6 billion in North America, leading to much-improved profits.

Even U.S. Steel is doing better. CEO Dave Burritt said U.S. Steel saw “higher prices and volumes in all of our segments.” Burritt also said management believes that if the steel market continues going as it is currently, it could earn as much as $1.70 per share this year – adding the caveat that unfortunately it doesn’t see the market continuing in the same manner for the rest of the year.

Analysts are questioning whether the present share value is justified, suggesting after falling some 30% already this year it could have further to go.

Analysts such as Citi see major “downside” in 2018 and 2019 to U.S. Steel’s share price, predicting a loss for the year even though the first half has been relatively (for U.S. Steel) strong.

Waning Optimism and What Comes Next

Some steel sector share prices were boosted earlier this year by the hope President Trump would pump billions into infrastructure. Then, as hopes faded for that outcome, they got a sugar rush from the prospect of trade measures to curb imports of foreign steel.

But the Motley Fool, quoting the Wall Street Journal last week, reported comments by the president suggesting he was kicking trade action into the long grass.

Trump said he does not want to impose tariffs and quotas on imported steel “at this moment.” Objections from trade partners (who don’t want their exports curbed), and from domestic steel users as well (who like the idea of cheap foreign steel) are sapping the administration’s support for the trade action. It’s hardly surprising, but until recently the steel lobby had been putting a powerful case for action, and it took time for counterarguments to gain traction.

The president went on to say that instead of imposing sanctions “very soon,” as the steel industry was hoping, his staff will need to do “statutory studies … addressing the steel dumping” issue. And while the president promised action “fairly soon,” he also said the administration plans to address health-care reform, tax reform, and may even want to get an infrastructure bill passed by Congress before returning to the steel issue.

So, for the time being, forget about it — “he has other fish to fry” seems to be the position.

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Without curbs to imports, the view for steel companies’ profits remaining robust becomes less compelling.

Companies like Nucor and Arcelor will continue to do well, but others, like U.S. Steel and AK Steel, will struggle later this year and into 2018.

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