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U.S. Raw Steel Output Ticks Down, Capacity Remains Below 80%

Published 07/09/2019, 08:47 AM
Updated 07/09/2023, 06:31 AM

U.S. raw steel production for the week ending Jul 6 slipped on a week-on-week basis as American 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 1,847,000 net tons for the reported week, a 0.2% decline from production of 1,851,000 net tons for the week ending Jun 29. Reported weekly production, however, rose 1.8% from production of 1,815,000 net tons logged for the same period a year ago.

Capacity utilization – a key metric in the steel industry – remained below the important 80% level for the second straight week. U.S. steel mills operated at 79.4% of their capacity last week. Capability utilization for the previous week was 79.5%, which fell from 80.5% for the week ending Jun 22. Capability utilization rate for the reported week, however, increased from 77.4% a year ago, per the AISI.

By region, output from Great Lakes fell 1.3% on a weekly basis to 688,000 net tons in the reported week. Mills in the North East produced 207,000 net tons of raw steel, down 3.3% from the previous week. Production from the Southern (NYSE:SO) region ticked up 1% to 679,000 net tons for the reported week. The Midwest region produced 203,000 net tons of raw steel, up 1% from a week ago. Output rose 4.5% in the Western region to 70,000 net tons.

Overall raw steel production (on an adjusted basis) through Jul 6 was 50,458,000 net tons at a capability utilization rate of 81.2%, up 5.3% from 47,918,000 net tons recorded in the same period a year ago at a capability utilization rate of 76.7%.

According to the AISI, production capability for second-quarter 2019 is roughly 30.3 million tons compared with 30.5 million tons a year ago and 29.9 million tons for the first quarter of 2019.

Weakening Steel Prices, Demand Are Concerns

The steep tariffs on steel imports, which the Trump administration levied in March 2018, helped U.S. steel industry capacity break above 80% (the minimum rate required for sustained profitability of the industry) last year after remaining below that level for years. The tariffs drove up production capacity of U.S. steel producers amid lower imports. Improved capacity also provided a boost to U.S. steel production.

The Trump administration’s trade actions also largely helped U.S. steel companies to rack up solid earnings in 2018. The tariffs provided a boost to U.S. steel prices last year, driving profits and cash flows of American steel makers including United States Steel Corp. (NYSE:X) , Nucor Corp. (NYSE:NUE) and Steel Dynamics, Inc. (NASDAQ:STLD) .

The trade actions also incentivized a number of U.S. steel makers 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.

Notably, after rallying to multi-year highs on the back of Trump administration’s imposition of 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 are now well below their peak level of roughly $920 per short ton (st) reached in July 2018.

Moreover, recent profit warnings from some key players amid falling steel prices and demand have raised concerns about a possible weak second quarter for the U.S. steel industry.

U.S. Steel, last month, said that it is idling three blast furnaces in response to the softening market conditions. The company will idle two blast furnaces in the United States and one in Europe to better align its global production with its order book. U.S. Steel’s Flat-Rolled segment is being hurt by lower steel prices and weakening end market demand.

U.S. Steel has started a planned maintenance outage at its Great Lakes B2 blast furnace in the United States. Moreover, the company plans to temporarily idle a south blast furnace at its Gary Works facility. It expects these moves to cut monthly blast furnace production capacity by roughly 200,000 to 225,000 tons starting this month. The company will resume production at one or both idled blast furnaces when market conditions improve.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are L.B. Foster Company (NASDAQ:FSTR) and Thyssenkrupp (DE:TKAG) AG (OTC:TKAMY) . While L.B. Foster carries a Zacks Rank #1 (Strong Buy), Thyssenkrupp has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

L.B. Foster has an expected earnings growth of 65.8% for the current year. Earnings estimates for the current year have been revised 14.8% upward over the last 60 days.

Thyssenkrupp has an expected earnings growth of 1,500% for the current fiscal year. Earnings estimates for the current fiscal have been revised 4.3% upward over the last 60 days.

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Nucor Corporation (NUE): Free Stock Analysis Report

Steel Dynamics, Inc. (STLD): Free Stock Analysis Report

L.B. Foster Company (FSTR): Free Stock Analysis Report

United States Steel Corporation (X): Free Stock Analysis Report

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