Production adjustments at US Steel Granite City expected: sources

US Steel could be the next steelmaker to announce additional production curtailments amid growing demand deterioration related to the coronavirus pandemic and an oil price war between Russia and Saudi Arabia, according to market sources this week.

The steelmaker announced the indefinite idling of two tubular facilities on Tuesday. Production cuts at its Granite City, Illinois, facility were a growing possibility as the mill supplies hot-rolled coil to the soon-to-be idled Lone Star Tubular Operations in Texas, sources said.

The St. Louis-area Granite City facility has two blast furnaces with a combined annual production capacity of 2.8 million st and produces hot-rolled, cold-rolled and coated sheets.

"I think integrated mills were already in a cash-conservation mentality heading into the year, or entering that mentality. So, I think they will evaluate speedier closures," KeyBanc analyst Phil Gibbs said during an S&P Global Platts webinar on Tuesday. "US Steel is likely going to idle a couple more furnaces, we think as well, and Granite City could be in play."

One service center source said the probability was high that US Steel would eventually curtail production at Granite City, after being informed directly from a contact at the company. Another service center source said a production curtailment had not been confirmed by the US Steel sales team, but that there had been discussions about blowing down one of the furnaces at the mill.

A third service center source said he had heard from contacts at the company that they expected a Granite City idling soon. Still, the facility could be tapped to help supply US Steel's West Coast operations with coil, added the source.

A spokeswoman for US Steel said the company would not comment on the speculation.

Earlier this year, the steelmaker announced it had acquired the remaining 50% stake of USS-Posco Industries (UPI) from POSCAL a subsidiary of South Korean steelmaker POSCO. UPI, which is located in Pittsburg, California, produces hot-rolled pickled and oiled steel, cold-rolled sheets, galvanized sheets and tin mill products. UPI's annual production capability is about 1.5 million st.

US Steel has idled and restarted production at Granite City over the past five years. Depressed oil prices were one of the primary reasons the steelmaker idled both furnaces at the mill in 2015. "As the primary flat-roll supplier of the oil and gas industry, the idling is part of an ongoing adjustment of steelmaking operations throughout North America to match customer demand," the company said in November 2015.

The S&P Global Platts US HRC price bottomed at $365/st in Q4 2015 amid the oil collapse. While the Platts TSI US HRC index is currently 52.6% higher at $560/st than in 2015, the ongoing price war between oil producing nations Saudi Arabia and Russia has caused severe reductions across the oil and gas sector.

In addition to US Steel's tubular production cuts this week, Tenaris also announced last week it would adjust its tubular production across North America, in response to falling demand.

In November 2019, US Steel laid off an undisclosed number of non-union employees at its Granite City facility, citing challenging market conditions.

The two furnaces were idled from 2015 until 2018 as the Section 232 steel tariffs were rolled out and helped push US HRC prices to near 10-year highs in the early parts of the third quarter.

More recently, Granite City has fallen outside US Steel's "best of both" strategy, which focuses on its three core assets: its joint-venture with Big River Steel; Mon Valley Works and Gary Works. The strategy resulted in the indefinite idling of iron and steelmaking operations at the company's Great Lakes facility scheduled for early second quarter.

If US Steel enacts production curtailment measures at its Granite City facility, it would be joining ArcelorMittal, who announced capacity reductions at its Indiana Harbor and Dofasco mills on Monday.