Despite demand uptick, US steel market faces global pressure: S&P Global Ratings

Even with a snap-back in domestic demand in late 2020 and 2021, lower-cost global steel production could cause a persistent glut, low prices, and low capacity utilization for the higher-cost steelmakers in the US, S&P Global Ratings said in a report Dec. 1.

The cyclical drop in steel production in the US is the third double-digit percent decline in about 10 years (with 15-20% decline expected in 2020), as the coincidence of the COVID-19 pandemic and the drop in oil and gas investment piled onto already declining demand from the construction and automotive sectors, the report noted.

At the same time, steelmakers in the US and Europe are facing increased pressure from investors and policymakers on environmental, social and governance (ESG) issues.

"In the event the downturn extends beyond 2022, we expect near-terminal damage to some assets and competitive positions because of global cost pressures and ESG considerations as the industry aims to reduce high greenhouse gas emissions from carbon steel," the report states.

The effects of the pandemic in the US have increased the shift from blast furnace/BOF steelmaking to more electric-arc furnace production.

"A couple of years of low capacity utilization for BOF producers would accelerate asset rationalization, likely ceding yet more market share to lower-cost imports, mini-mill steel, and aluminum," the report states. "Overall, we estimate that demand from key sectors will decline 5%-20% in 2020 and 2021 with a long path to recovery, likely remaining below 2019 levels until 2022."

Combined, the automotive and construction industries account for more than two-thirds of steel consumption in the US, with machinery and energy accounting for another 15%, highlighting the industry's demand exposure to capital investment cycles, S&P Global Ratings said.

US hot-rolled coil prices have surged as demand has picked back up, but steel utilization rates have remained below pre-COVID-19 levels and inventories are at decade lows, S&P Global Ratings said. The daily Platts TSI US HRC index was set at $784/st on Nov. 30, with the index rallying nearly $350 since early August when it reached an almost five-year low.

"For the better-positioned mini-mills, profitability could get a boost from robust automotive contract pricing for 2021 as they enter the contract pricing season with [HRC] spot prices approaching $750/st," S&P Global Ratings said. "However, prices could be more volatile than usual, considering that demand from key markets could remain below 2019 levels until 2022 and steel production will increase as curtailed capacity and new builds come back online amid persistent global steel overcapacity."

S&P Global Ratings is part of the S&P Global group, alongside S&P Global Platts.