U.S. Raw Steel Production Skids As Capacity Stays Below 80%

U.S. raw steel production for the week ending Sep 14 slipped as domestic steel mills continued to operate below 80% of their capacity – according to the latest weekly report from the American Iron and Steel Institute (“AISI”), an association of North American steel makers. Output for the reported week was down on a week-on-week basis across all steel producing regions barring the Great Lakes.

Per the AISI, domestic raw steel production clocked 1,811,000 net tons for the reported week, a 1.3% drop from production of 1,835,000 net tons for the week ending Sep 7. Reported weekly production also fell 2.9% from production of 1,866,000 net tons logged for the same period a year ago.

Capacity utilization – a key metric in the steel industry – remains below the important 80% level (the minimum rate required for sustained profitability of the industry) for the third straight week. U.S. steel mills operated at 77.8% of their capacity last week. Capability utilization for the previous week was 78.8%. Capability utilization rate for the reported week also declined from 79.6% a year ago, per the AISI.

By region, output from Great Lakes ticked up 0.9% on a weekly basis to 692,000 net tons in the reported week. Mills in the North East produced 201,000 net tons of raw steel, down 6% from the previous week. Production from the Southern (NYSE:SO) region dipped 0.6% to 668,000 net tons for the reported week. The Midwest region produced 179,000 net tons of raw steel, down 5.8% from a week ago. Output fell 2.7% in the Western region to 71,000 net tons.

Overall year-to-date (through Sep 14) raw steel production on an adjusted basis was 68,959,000 net tons at a capability utilization rate of 80.7%, up 3.8% from 66,455,000 net tons recorded in the same period a year ago at a capability utilization rate of 77.5%.

According to the AISI, production capability for third-quarter 2019 is roughly 30.6 million tons compared with 30.8 million tons a year ago and 30.3 million tons for the second quarter of 2019.

Softening Steel Prices, Demand Raise Red Flags

The Trump administration’s imposition of hefty punitive tariffs on steel imports helped U.S. steel industry capacity break above 80% last year after remaining below that level for years. The tariffs drove up production capacity of U.S. steel producers amid lower imports and also provided a boost to domestic steel production.

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. Moreover, a slowing Chinese economy amid trade tensions with the United States has led to a slowdown in steel demand in China, the world’s top consumer of the commodity.

Notably, after rallying to multi-year highs on the back of broad-based 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 went downhill through the second quarter of 2019 and continued their slide in the third quarter, partly due to demand weakness. Some of the U.S. steelmakers have recently taken steps to reduce capacity in the wake of declining domestic steel prices.

Meanwhile, profit warnings from some key players this week amid falling steel prices and demand have raised concerns about a possible weak third quarter for the U.S. steel industry.

Notably, shares of United States Steel Corp. (NYSE:X) got battered yesterday after it issued underwhelming guidance for the third quarter. The company projected wider-than-expected loss for the quarter as it expects its Flat-Rolled segment to be hurt, through the second half, by lower steel prices. U.S. Steel noted that it will continue to idle its two U.S. blast furnaces at least through the end of 2019. The company’s shares tumbled around 11.2% to close at $11.06 yesterday.

U.S. Steel was the third major American steel producers to issue underwhelming guidance for the third quarter. Nucor Corporation (NYSE:NUE) and Steel Dynamics, Inc. (NASDAQ:STLD) also provided weaker-than-expected earnings guidance for the September quarter. Nucor sees lower profits on weaker prices and softer demand across certain markets. Steel Dynamics also cited lower average steel prices in its guidance.

Falling steel prices, softening demand across major markets and trade tensions have also weighed on steel stocks this year. Moreover, the benefits of the tariffs on steel imports have diminished.

Shares of U.S. steel producers got a lift earlier this month after staying down for most of this year. Hopes for a de-escalation in the U.S.-China trade war provided a boost to the shares of major American steel companies. But disappointing third-quarter views from key players have hurt U.S. steel stocks this week.

Downbeat guidance from these major U.S. companies reflects weak underlying fundamentals of the American steel industry.

The Zacks Steel Producers industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector so far this year. The industry has declined 7.1% over this period compared with the S&P 500’s rise of 18.5% and broader sector’s growth of 2%.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are L.B. Foster Company (NASDAQ:FSTR) and Carpenter Technology Corporation (NYSE:CRS) . While L.B. Foster carries a Zacks Rank #1 (Strong Buy), Carpenter Technology 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 86.3% for the current year. Earnings estimates for the current year have been revised 12.4% upward over the last 60 days.

Carpenter Technology has an expected earnings growth of 13% for the current fiscal year. Earnings estimates for the current fiscal have been revised 2.4% upward over the last 60 days.

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