By Timothy Aeppel
(Reuters) -Steel prices, driven to nosebleed highs by surging demand, should start to "erode" by the first part of next year as COVID-related supply bottlenecks ease and new domestic production comes online, said Mark Millett, the chief executive of the fourth-largest U.S. steelmaker, Steel Dynamics (NASDAQ:STLD) Inc.
But the long-term health of the U.S. industry depends on avoiding a surge of imports, which have driven the downside of past boom-and-bust cycles for steelmakers, he added.
"We’re starting to see inventories rebuild a little and we’re starting to see import volumes pick up a little - so it would be natural to see pricing turn over" in the first part of 2022, said Millett, who also chairs the Steel Manufacturers Association, the industry's main trade voice in Washington.
Demand for all types of metal plunged early in the pandemic but then recovered far faster and rose to higher levels than anyone expected. Now the focus is shifting to the Biden administration’s ambitious infrastructure plan, which would require large amounts of steel for construction projects and machinery, and create another boon for domestic producers, assuming the metal was purchased from domestic mills.
Price pressures have fanned out through the economy in recent months, impacting everything from food to used cars, as a result of pandemic disruptions. Inflation data for September out on Wednesday showed the annual consumer inflation rate ticking back up to its highest level since 2008, and the supply disruptions have prompted the White House to push the biggest U.S. ports to operate around the clock to ease congestion.
Millett said high steel prices shouldn’t hinder the government infrastructure plan. "Once an infrastructure bill passes, you don’t suddenly see trillion-dollar projects arrive on your doorstep," he said. Instead, he predicts at least a year-long "ramp-up" period, which would allow the industry to overcome supply chain disruptions that have magnified shortages and added to pricing pressure.
U.S. producers, including Steel Dynamics and United States Steel (NYSE:X), are building new plants that will open over the next two years and the market will need imports in the future, said Millett, noting that historically the United States has imported steel equivalent to about 20% to 22% of domestic demand. The problem is when imports surge far beyond that, he said.
"When it gets up to 27-28%, and when it comes flooding in, that’s when pricing gets decimated," said Millett. "The industry can’t earn its cost of capital."
That’s why the industry is pushing to keep trade barriers in place that have helped insulate the domestic market. The United States is currently negotiating with the European Union over limits on imports of metal from that region’s producers.
Millett said the EU hasn’t "been a major problem historically" and that he believes the administration is looking at ways to agree on some type of quota that would prevent a "surge" of imports. "As long as they fight hand-in-hand (with the U.S. industry) against the Asian, the Chinese threat, I think we can benefit," said Millett.
A steel industry source said the U.S. Trade Representative and the EU were edging closer to a likely agreement that would replace Section 232 tariffs with a tariff-rate quota (TRQ) arrangement that would allow duty-free entry of a set volume of EU steel, with tariffs applied to higher volumes.
The EU's trade chief, Valdis Dombrovskis, has expressed https://www.reuters.com/article/usa-trade-eu-metals/eu-ready-to-look-at-north-american-style-metals-arrangement-with-u-s-trade-chief-says-idUSL1N2QU1TV openness to a quota arrangement similar to those that Canada and Mexico have with the United States, but said that a deal is needed by early November. Other EU officials have told Reuters that much depends on the volume of steel allowed duty free into U.S. ports.
The industry source said that EU negotiators are seeking to base the quota on U.S. import volumes prior to the imposition of the 232 tariffs in 2018, while U.S. negotiators want to base the quotas on lower volumes after the tariffs were imposed. Spokespersons for the USTR and the EU could not immediately be reached for comment.