Steel is essential it's in
everything. Think appliances like dishwashers and dryers, and
fridges and microwaves, or even air conditioners, not to mention
planes, trains and automobiles, and every type of manufacturing from
machinery needs steel to build windmills, solar panel systems,
certainly to build out the electricity grid. When the pandemic threw supply
chains into chaos, steel was no exception, prices dropped, then
popped A boom in steel demand. Demand is relentless. I think people feel like steels
price will go higher. I've been looking at this as
probably the second biggest impact to steel makers ever. And
I think that the largest impact is World War Two. Impending steel shortages become
a major problem as America's war production streamlines into
high. Steel prices spiked 300% over
pre pandemic levels, at one point pricing over $1900. That's
up from steel's pre pandemic price range between $500 and
$800. They have turned into a bubble
that and that bubble is they just go higher because they go
higher, we should see prices move back probably in a pretty
violent manner. Is that the bubble popping? Yes, yep. Steel is one of those
categories, which prices have really risen dramatically. So
certainly one of those examples of shortages, higher prices,
growing frustration among customers. Plus steel remains a key
material in infrastructure projects. So the Biden
administration's plan to inject billions into US infrastructure
will be a huge boon to the steel manufacturers. We estimate that for every 100
billion dollars of new investment in infrastructure,
that's going to mean 5 million tons of additional steel demand. 2021 steel demand is expected to
increase 3.8% over 2020, according to the World Steel
Association. Can the US steel industry keep
up with the demand and what happens when that bubble pops? Steel can be manufactured in two
ways. First, there's the integrated method. In the
simplest terms, you mine iron ore, you smelt the ore in a
blast furnace with additional materials like coke, a form of
process coal and limestone, and then you've made steel. But in the United States today, we
actually make 70% of our steel using a different method, which
is what we in the industry we call the electric arc furnace
route. It's a way of melting down old
steel scrap steel into brand new steel. Previously blue steel, old carb
bodies, refrigerators, steel that was in old buildings, and
that is shredded and melted down. Other alloys are added in like
some new iron ore and then the furnaces tipped to pour out the
molten steel. When it comes to clean steel,
the US certainly is leading the way. But there is work yet to be done
to make us steel production emit less carbon. Two of the US's
biggest steel companies, Nucor and Steel Dynamics, both use
electric arc furnaces or EAFs. If you think about the furnaces,
the new cores and the steel dynamics, they have very
competitive cost structures. They're very flexible in cost.
They have a history of really good financial performance. And
certainly their their stock has increased throughout all of this
because higher prices have led to higher margins, which leads
to higher earnings, but their stock hasn't moved as much
as some of the other ones. The other ones, Cleveland Cliffs
a purveyor of the integrated method, but they have some EAF
mills too. And there's US Steel. The people that have moved the
most though has been Cleveland Cliffs and US Steel. The market
has been very challenging. It's been very competitive. And
they've had to take on an increasing amount of debt
leading up to the pandemic just to continue on. And then because
of the structural change in the market, these mills earning
excessive to historical norm margins, they've been able to
pay down debt, pay off debt or buy back billions of dollars o
shares. So the steel mills real y are a different company tod
y than they were two years ag Steel prices are good, and they
will continue to be strong. It's all about demand. We have
limited supply, and people want things done right now. So that
creates competition. That's the basis of capitalism will
continue to work to reward our shareholders and to generate the
cash that is necessary to reinvest in our business. The coronavirus pandemic
definitely had an impact on the steel industry. Now steel
producers were generally identified as essential
industries so they weren't shut down by any government action.
But many of our customers saw big drops in demand for
instance, in the auto industry which buys maybe 25 26% of all
the steel produced in the United States every year, largely shut
down in the spring of 2020. And a lot of construction projects
were slowed, everything. So demand for steel dropped
precipitously between the middle of March and May, so much so
that steel producers in the US responding to that market signal
did reduce production dramatically. We had a number of
steel mills that shut down altogether. Steel production went way down,
and inventories depleted, and then demand started picking back
up. So we've seen a huge, huge
increase in demand. So much so that you know, steel production
today is up 60% over where it was at the low point back in May
of 2020. The economy began gaining steam
in late 2020 as vaccines began to roll out. We have seen with this pandemic,
locking things down and coming out of the lockdown was that
there truly was a shortage, buyers could not get as much
steel as they required just for normal operations outside of
nobody was able to hoard steel, nobody was able to build any
inventories because the mills were limited in terms of how
much of each contract they could they can satisfy and they
weren't selling much less than their their contractual volumes
just because of this shortage. And then when demand came around
you back distributors were caught short and then everyone
started ordering steel at the same time. And it does take some
time to make that steel. So our plants started coming back as
quickly as they could. The US also imports a ton of
steel. China is easily the world's
leading manufacturer of steel. So we import a lot of them, we
benefit from those low prices. But again, those tariffs have
been in place, and that causes prices to rise. I'm not saying
those tariffs are a good thing or a bad thing. I'm simply
saying that they would tend to drive up price and they have
done that. The US is the world's largest
net importer of steel. Steel imports are up 17.5% year to
date as of August 2021, the US imported more than 16 million
metric tons of steel so far in 2021 as of July. But depending
on which country these imports come from, there's a tax on the
steel imports, aka tariffs. In 2018. President imposed
across the board steel tariffs as a national security measure
because they were, the concern was that the levels of imports
coming in were undermining the viability of the industry over
the long term. President Trump said the
increase in imports posed a threat that could drive US
producers out of business, leaving the country dependent on
foreign suppliers. Then he exempt big trading partners
Canada and Mexico from these tariffs. When the Trump administration
first started to implement those tariff increases, there was a
big squeeze on domestic steel. So all of a sudden, people said
I don't want to pay those tariffs. I want us manufactured
steel. And part of that was because it just there was this
notion of this is by American, let's produce more here. But
what happened of course, when foreign steel prices go up, the
masses steel prices go up. Steel prices were rising significantly
during much of the Trump administration. And of course,
the pandemic. Customers buying steel felt the
impact of both the high prices and tariffs. On the flip side, I will say the one good piece of
news is because we had those steel tariffs in place in 2020.
The COVID-19 crisis could have been another demand shock, very
similar what happened in the late 1990s. Or in 2008, 2009, we
could have seen a new surge in imports because when imports
come in at very high levels, they tend to undercut domestic
producers, they often sell at a loss in this market what's
called dumping. Dumping is when other firms or
countries come into another country's market and dump
products at artificially low prices. We put tariffs on all the crap
that they were dumping from China 25%, they were dumping the
steel than we said you can't do that. So dumping makes it hard for us
manufacturers to run mills at a profit. But because we had those tariffs
in place, that didn't happen. And so the industry remained
healthy, was able to recover, continue its investment and be
in a strong position to meet the growing demand that we see
today. You want to be running your steel mill as close to full
as you can to really cover those fixed costs. Plus, you really
want to be running at least 85% capacity utilization, which is
where we are today. But back in those years before the steel
tariffs were imposed, we were running only in the low 70%
range. And that was really an unsustainable level for us. That
was because of the high level of imports coming in in those
years. Tariffs also created an
environment that incentivize the US industry to invest in its
facilities. We've spent close to $16 billion
dollars, just since 2018. And investments in new facilities
and upgrading existing facilities. We do have pretty substantial
amount of new capacity that's coming online that was in
planning to be built for the past few years. They're coming
online in Texas and Kentucky and in Toledo, Ohio. As that comes
online, we expect prices to move back towards a more historic
norm. I think what really comes next
is the mills are going to be earning incredible profits this
year, most of next year. We have already made in revenue
more than $9 billion this year, in six months infrastructure
bill will be an icing on the cake. And I think what's next, it
really is how are they going to be investing those profits? What
are they doing with it? For a long time was to continue
and invest in the down cycles to create higher highs and higher
lows. So the mills that are coming up online now are
benefiting from that. As for steel prices in the US, There's a supply deficit that's
supported prices, and that supply deficit is easing going
away. And as that happens, we should see prices move back
probably in a pretty violent manner, at least in the start,
maybe a 15 to 20% drop in a matter of a month. And as that
happens, prices will then be on there trend line down back
towards more historic levels. Is that the bubble popping? Yes, yep. We see we see prices peaking
here. And that really, it should be in this half of this year. I don't know that I would say
that we're in a bubble that's going to be burst. I think we're
going to see continued strong demand. The good news is that steel
supply capacity will rise over time a cure for high prices is
high prices. So when steel prices are high, that creates an
incentive for suppliers to increase output and eventually
capacity. I think you're going to see that happen. And so we
hopefully will see lower price at some point in the future,
even as the world continues to use more steel.
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Have you ever tried to open a new steel plant in the USA? It's on par with opening a refinery.
When was the last refinery opened in the US?
1977
All other refineries have just been expanded or renovated on the same land they were on because the red tape is made from titanium.
So, steel, like petroleum, is an industry kind of painted into a corner.
Big shoutout to cnbc for using LG saying demand is relentless boss move
Politics aside, Trumps tariff on steel imports, and Biden’s continuation of the tariff, is a boon to NA steel and manufacturing. Time to start bringing jobs back home. China can go kick rocks!
Steel stocks haven’t moved up much in the last month or so. With protections, bills and prices it seems like there are good reasons for stocks to increase in price 50% or more but I think the big money institutions are content to manipulate prices so they keep earning on options in a narrow range. Frankly I’m tired of it and looking to make money on other stocks.
Wow, this is an excellent video. High quality stuff coming from CNBC in this case.
Well, steel prices in the US are incredibly stretched from a historical perspective and steel prices will absolutely moderate over the medium term as supply and demand begin to balance out.
But, the rapid increase in steel prices is not based on FOMO or speculation or excessive exuberance or any of the other characteristics of a bubble. There is simply a supply and demand imbalance and I expect that imbalance to start moderating in the beginning of 2022, but there will be no bubble popping although steel prices will decline albeit remaining at historically high levels.
Wow, this was actually really good! I'm surprised.
It seems like there has been a lot of mainstream steel coverage these last few days.
The tone of this video was so confident in significant price decreases.
States as fact steel is a bubble and will pop. As opposed to commodity super cycle, as opposed to a slow drawdown.
States that steel “at one point priced over $1,900”. One point was last week practically.
Makes me think that the drop is…already priced in. It can work in our favor every once in a while.