Grim Business Conditions For Steel Reflected In U.S. Steel’s Announcement To Permanently Close Alabama Facilities

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U.S. Steel (NYSE:X) has announced plans to permanently close its blast furnace and most of the associated steelmaking operations in Fairfield, Alabama, a move that more closely aligns the company’s operations with the unfavorable business conditions prevailing in the domestic steel industry. [1] Though the company has not specified the reduction in steelmaking capacity as a result of this action, it would likely impact a significant chunk of the 2.4 million tons of raw steel production capability of U.S. Steel’s Fairfield Works. [2] The company’s overall steel production capacity currently stands at 24.4 million tons. [2] Competition from cheap steel imports has dampened the prospects of the domestic steel industry, negatively impacting both pricing and shipments for domestic steelmakers.

  • Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, up sharply from 15% in 2013. [3] The surge in steel imports was driven by the strengthening of the U.S. Dollar and a sharp increase in Chinese steel exports. The bulk of these imports are sourced from countries with low production costs and in some cases, government support in the form of subsidies or tax breaks for their steel industry. The strengthening of the Dollar against global currencies, as illustrated by the figure shown below, has made these imports even cheaper in Dollar terms. Moreover, overcapacity in the Chinese steel industry has boosted that country’s steel exports, which rose 36% year-over-year in the first four months of 2015, contributing to the glut in U.S. steel imports. [4]

Dollar Index, Source: Bloomberg

  • Adding to the negative impact of cheap steel imports, demand for steel remains fairly weak in North America, with the World Steel Association expecting steel demand in the North American Free Trade Agreement (NAFTA) region to decline by 0.9% in 2015. [5] This is partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. [6]
  • Domestic steelmakers have sought the imposition of anti-dumping duty on steel imports from China, India, Italy, South Korea, and Taiwan, claiming that these imports are priced unfairly low. [4] It remains to be seen whether the domestic steel industry’s petition is successful. For now, imported steels have certainly taken their toll on the prospects of companies such as U.S. Steel, as indicated by our shipment forecasts for the company’s flat-rolled steel division.

See our forecasts for U.S. Steel’s Flat-rolled division’s shipments

See the links below for more information and analysis:

How A Strong Dollar Impacts Steel Companies

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Notes:
  1. U. S. Steel Proposes Permanent Closure of Blast Furnace and Most Flat-Rolled Finishing Facilities in Alabama, U.S. Steel News Release []
  2. U.S. Steel’s 2014 10-K, SEC [] []
  3. U.S. Steel’s Q1 2015 10-Q, SEC []
  4. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal [] []
  5. Short Range Outlook 2015-2016, World Steel Association []
  6. Short Range Outlook 2014-2015, World Steel Association []