U.S. Markets closed

US Raw Steel Production Slips, Slumping Prices Raise Red Flag

Anindya Barman

U.S. raw steel production for the week ending Oct 5 dropped as domestic steel mills continued to operate below 80% of their capacity.  

Per the latest weekly report from the American Iron and Steel Institute (“AISI”), an association of North American steel makers, domestic raw steel production clocked 1,804,000 net tons for the reported week, a 1.2% decline from production of 1,825,000 net tons for the week ending Sep 28. Reported weekly production also dropped 3.9% from production of 1,877,000 net tons logged for the same period a year ago.

Capacity utilization – a key metric in the steel industry – remains below the important 80% level (the minimum rate required for sustained profitability of the industry), for the sixth straight week. U.S. steel mills operated at 78% of their capacity last week. Capability utilization for the previous week was 78.4%. Capability utilization rate for the reported week also declined from 80.1% a year ago, per the AISI.  

By region, output from Great Lakes ticked down 1% on a weekly basis to 659,000 net tons in the reported week. Mills in the North East produced 211,000 net tons of raw steel, up 3% from the previous week. Production from the Southern region dipped 3% to 663,000 net tons for the reported week. The Midwest region produced 196,000 net tons of raw steel, down 2% from a week ago. Output rose 7% in the Western region to 75,000 net tons.

Overall year-to-date (through Oct 5) raw steel production on an adjusted basis was 74,257,000 net tons at a capability utilization rate of 80.4%, up 3% from 72,063,000 net tons recorded in the same period a year ago at a capability utilization rate of 77.5%.

According to the AISI, production capability for third-quarter 2019 is roughly 30.6 million tons compared with 30.8 million tons a year ago and 30.3 million tons for the second quarter of 2019.  

Weaker Steel Prices, Demand Taking Toll on U.S. Players

The Trump administration’s imposition of steep tariffs on steel imports helped U.S. steel industry capacity break above 80% last year after remaining below that level for years. The tariffs drove up production capacity of U.S. steel producers amid lower imports and also provided a boost to domestic steel production.

The trade actions also provided incentive for a number of U.S. steel makers including United States Steel Corp. X and Steel Dynamics, Inc. STLD to invest heavily on ramping up production capabilities and upgrading facilities. However, higher production driven by the added capacity has contributed to the sharp decline in U.S. steel prices this year.

A slowing global economy and waning steel demand are other factors for the decline in steel prices. Steel demand has softened across the United States and Europe. Moreover, a slowing Chinese economy amid trade tensions with the United States has led to a slowdown in steel demand in China, the world’s top consumer of the commodity. A slowdown in global manufacturing activity, partly due to trade war, is hurting demand for steel.

Notably, after rallying to multi-year highs on the back of broad-based tariffs on imported steel, U.S. steel prices have now fallen back to the levels seen prior to the tariff announcement. The benchmark hot-rolled coil steel prices went downhill through the second quarter of 2019 and continued their slide in the third quarter, partly due to weak domestic demand. Prices are down more than 40% from the high levels reached last year.

Some of the U.S. steelmakers have recently taken steps to reduce capacity in the wake of declining domestic steel prices. This has contributed to the recent decline in U.S. steel production. However, lower production is yet to make any notable positive impact on domestic steel prices.

Meanwhile, profit warnings from some key players amid falling steel prices and demand have raised concerns about a possible weak third quarter earnings season for the U.S. steel industry.

Falling steel prices, softening demand across major markets and trade tensions have also weighed on steel stocks this year. Moreover, the benefits of the tariffs on steel imports have diminished. The underlying fundamentals of the American steel industry remain weak notwithstanding the Trump administration’s measures to protect the industry through punitive tariffs.

Shares of U.S. steel producers got a lift earlier last month after staying down for most of this year. Hopes for a de-escalation in the U.S.-China trade war provided a boost to the shares of major American steel companies. But disappointing third-quarter views from key players weighed on U.S. steel stocks later in the month.

The Zacks Steel Producers industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials Sector so far this year. The industry has declined 19.8% over this period compared with the S&P 500’s rise of 15.3% and broader sector’s decline of 4.9%.



 

 

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are L.B. Foster Company FSTR and Carpenter Technology Corporation CRS, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

L.B. Foster has an expected earnings growth of 86.3% for the current year. Earnings estimates for the current year have been revised 12.4% upward over the last 90 days.

Carpenter Technology has an expected earnings growth of 13% for the current fiscal year. Earnings estimates for the current fiscal have been revised 0.5% upward over the last 90 days.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.      

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.   

See the pot trades we're targeting>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
 
United States Steel Corporation (X) : Free Stock Analysis Report
 
L.B. Foster Company (FSTR) : Free Stock Analysis Report
 
Carpenter Technology Corporation (CRS) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research