At the recent 2019 SMU Steel Summit, one topic featured prominently in discussion and debate among participants: the wave of upcoming steel mill investment. Will this mean a prolonged collapse in prices, or is this capacity required and likely to simply gain share at the expense of imports or older, higher-cost domestic production?
Views from the panel
An abundance of new steel capacity is coming online in North America, primarily in the US. At CRU, we have identified 7 Mt (million metric tonnes) of new EAF-based sheet capacity to start between 2021 and 2024 from four producers (Big River Steel, North Star Bluescope, Nucor and Steel Dynamics). In addition, two new hot strip mills will be commissioned in Mexico which may further lead to more intense competition between steel sheet producers.
At the SMU Steel Summit, three speakers gave their views on how this new supply would influence and reshape the industry over the next several years.
Timna Tanners, Managing Director in Americas Equity Research at Bank of America
Timna Tanners has been best known recently for putting forth views on the consequences of this new wave of investment activity at steel mills. In Ms. Tanners’ talk, she made a few key bold predictions. First, these investments will add a “freight train” of new supply that will result in the “mother of all price wars” with the potential to drive HRC below $450 /s.ton in 2022. The obvious winner is the consumer as the quality and quantity of domestic steel increases while steel prices fall towards levels seen in other parts of the world.
Lynn Lupori, Head of Consulting, North America at CRU Group
Lynn Lupori, a CRU consultant to miners, metal producers and users was not as bearish. In Ms. Lupori’s view, this new capacity will result in closures of existing, less competitive facilities. Re-rollers are particularly at risk as well as some of the recently restarted capacity - producers that are either higher cost or those with very limited finished product capabilities.
There is a significant opportunity for new capacity to take share from imports, which is a driver for these new investments. New capacity will compete with imports due to the adaptation of new steelmaking technology as well as their strategic location near major consuming markets. Lastly, Ms. Lupori noted that not all the announced capacity may come online - or at least not on time. Delays are inevitable and some producers with original intentions to add new capacity may ultimately back off.
Paul Lowrey, President, Steel Research Associates, LLC
Paul Lowrey, another industry consultant, noted the adoption of new technology in intended investments. In Mr. Lowrey’s view, new capacity expansions are overdue and stand to displace imports as consumers are able to obtain high quality products from more domestic producers. They will shift the industry cost curve down, although higher quality scrap will still be needed.
During the conference, John Packard, President & CEO of Steel Market Update engaged with steel mill executives who spoke, amongst other things, about their upcoming ability to produce products that have not been available from existing US mills. For example, Mark Millett, CEO of Steel Dynamics, was passionate about adding capabilities that would take market share in the energy sector away from foreign competition.
CRU View: Supply gains will drive steel prices down, forcing exits
Overall, we agree with the panel in that new capacity will take share from less competitive producers. Those producers that lose are less technologically advanced, higher cost and logistically challenged versus new production facilities.
With 7 Mt of new EAF-based sheet capacity coming online by 2024, prices will remain under pressure. These lower prices will remain until higher cost, less productive supply exits the market, regardless if this is in the form of imports to the US or domestic production. At the same time, we expect some margin squeeze for EAF producers as higher demand and competition for scrap will likely boost prices for this key input.
Winners from this new capacity drive will be the steel users as they gain access to lower-priced, yet high quality domestic steel with short lead times. The losers are importers, but crucially include older, higher-cost domestic producers. They will be forced to alter their production footprint and/or process once lower prices manifest.
