Outlook Positive, But Prices May Peak
By Tim Triplett, Editor-in-Chief
The outlook for the U.S. steel market is positive this year, but prices may soon peak, predicted Amy Bennett, principal consultant with Metal Bulletin Research, who spoke at the annual
meeting of the Fabricators & Manufacturers Association in New Orleans last month.
Two $30 price increases by major U.S. hot-roll mills in February and March pushed the benchmark hot-roll price up over $640 per ton. “We see these announcements gaining traction in March and possibly holding into April,” she said, “but at that point we worry U.S. prices may hit their peak for the year.”
Steel prices have experienced big ups and downs in the past two years. Prices bottomed out at unsustainable levels in late 2015, prompting production cuts by producers in the United States and China. The cutbacks worked, adding to a turnaround in 2016. In fact, U.S. prices rose to levels much higher than elsewhere. “We really feel U.S. prices overshot sustainable levels in 2016,” Bennett said. “We worry that prices in the U.S. may return to some unsustainable high in 2017.”
Steel prices in the United States and the rest of the world are highly dependent on what happens in China. Steel consumption in China is on the increase, which has eased its exports onto the world market. Reflecting its stronger domestic economy, China’s finished steel exports declined 26 percent year-on-year in the first two months of 2017. Chinese steel production is also on the increase, however. MBR expects China’s steel output to grow by about 1 percent this year.
The Chinese government is under a lot of pressure from other nations to cut its excess steelmaking capacity. By 2020, it has pledged to cut either 100 million tons of capacity in one scenario, or 150 million tons in another scenario, while increasing mill capacity utilization rates to 75 percent. At the 100-million-ton level, with the increased utilization, the nation’s steel production will still increase over the next few years. “Chinese steelmakers are often controlled by the local provincial government and they do not have a lot of incentive to eliminate steel capacity. It’s more important to them to maintain employment and social stability,” she noted.
As of third-quarter 2016, the Chinese were behind in their promised capacity closures. And that does not take into account planned capacity additions. This year, 25 million tons of new capacity is expected to come on stream in China. “The net effect of these capacity closures will be pretty minimal in 2017,” Bennett said. “We expect China to continue exporting a considerable amount of steel.”
On the demand side, growth in auto production has supported steel for the last several years. But the auto market has passed its peak and will plateau over the next few years. The industry is forecast to produce 17.7 million vehicles this year, down from 17.9 million in 2016. “We don’t expect a collapse, but we will have to get used to slower growth from the auto industry,” Bennett said.
Filling the gap will be new demand from the construction sector, both residential and nonresidential, though not right away, she continued. “Comments from the new administration, and a $1 trillion infrastructure investment, would be great for steel demand. However, we don’t expect steel to see the effect until late 2017 or even into 2018. But going forward, construction will certainly help to offset some of the slowdown in auto.”
Steel shipments to the energy sector are improving after a rough 2015 and 2016. Trump administration support of pipeline projects is promising. Drill rig activity bottomed out in mid-2016 and is on the upswing, though at a slow pace. “This time there will be no oil and gas boom,” Bennett said, like there was post-recession.
On the supply side, U.S. crude steel production declined 1 percent last year. U.S. steelmakers struggled to raise average operating rates to profitable levels above 75 percent of capacity, partly due to competition from imports and partly due to sluggish demand. The outlook for 2017 is more positive, Bennett said. U.S. industrial production is forecast to rise 2.9 percent this year. Global industrial production is rising at its fastest rate in seven years. “This is good news for steelmakers all over the world, because they will see stronger demand in their home markets and have less need to export
to the U.S.”
Steel production is likely to rise in the United States as the new Big River Steel mill in Arkansas and the restarted Acero Junction mill in Ohio ramp up. Other idled capacity is likely to come back online, including ArcelorMittal’s Indiana Harbor furnace. Overall, MBR expects U.S. crude steel output to increase by 2-3 percent in 2017.
With raw material prices moving lower, orders from the auto industry slowing, and new demand from the construction and energy sectors still months away, U.S. hot-roll prices will plateau at around $650 to $660 per ton, then correct downward, Bennett predicted. Nevertheless, for the year as a whole, MBR forecasts an average hot-roll price of $610 per ton, considerably higher
than the $522 average last year....