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How the Pandemic Affected the Steel Sector: Opinion

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u.s. steel industry, steel warehouse, coilsIn March 2020, President Trump declared a national emergency under the Stafford Act. This freed up $50 billion in federal resources to combat the coronavirus outbreak.

On March 26, Senate unanimously passed the $2 trillion stimulus plan. This gave cash and assistance to U.S. citizens, small businesses, airlines, manufacturers, and more. It also gave an extra boost to unemployment benefits.

During the pandemic, businesses were being categorized essential or non-essential. Much of the manufacturing industry was deemed essential and were able to continue operations, as close to normal as possible.

The Pandemic’s Impact on Service Industries vs. Manufacturing

Although the U.S. manufacturing sector was deemed essential, this wasn’t the case for many other industries in the U.S., such as service industries, like foodservice and hospitality, retail industries, and several small businesses were shutdown. Many employees were laid off or furloughed resulting in job loss comparable to the Great Depression.

While the U.S. regained 2.5 million jobs in May, there are still so many Americans out of a job. And, unfortunately, the extra boost in unemployment benefits is scheduled to expire in July. It’s likely that there just won’t be enough jobs available by then. Service industry jobs are starting to open back up, but not at the rate necessary to get Americans back to work.

Business loans that were given to small companies with the requirement that they keep at least 90% of their workforce in order to be relieved of payment, are also going to run out and those businesses will most likely start laying people off to make up for the difference.

So, while employment rose more than expected in May, a second wave a decline is likely.

The Unpredictable Impact of COVID-19 Across Geographic Locations

While Metalwest, and companies similar to us, were able to continue operating during the pandemic, the impact was different across our locations depending on the local situations. The severity of the quarantine and isolation influenced the level of manufacturing activity.

Different states have different restrictions. The impact on our corporate branch in Colorado and their customers were impacted early but they have mostly returned to work compared to our customers supported by our New Jersey branch. Many of their customers have not returned to full operations or not operating at all right now.

Local rules have a much greater influence on if locations can return to regular activity or not. Companies with multiple locations across the U.S., and even the world, are not only facing the challenges of COVID-19, but the challenges of COVID-19 based on location.

Moving forward, as the nation opens back up, companies will have to learn to adapt.

So, what has this meant for the steel mills?

As the pandemic made its way to the states, several mills idled capacity or went into maintenance shutdowns, some indefinitely.

Why did this happen with manufacturing being deemed essential? Well, the demand just wasn’t there.

Signs of softening were already apparent with the pandemic looming. But, once the president announced the national emergency, it didn’t take long for businesses to close their doors or slow down their material requirements. This was quickly seen in their buying patterns, which in turn was seen in suppliers’ buying patterns, and then eventually in the mills’ material requirements.

So, production slowed. Drastically.

The supply was and still is out there, but the demand came to a screeching halt. Customers stopped needing material because consumers were not buying and many customers were forced to shut their doors.

Luckily, there are signs that facilities will be turned back on as the economy and demand show signs of improvement. And with that, some mills have begun to restart idled facilities.

Looking Forward

While the economy is showing signs of improvement with many states easing their restrictions and service industries opening back up, the increase will likely be gradual. Prepare for a long difficult summer.

Tony Hammes, VP supply chain, contributed to this post
Aluminum Sheet Metal West

Where the U.S. Steel Industry is Heading: Opinion

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In March 2018, President Trump placed the 25% tariffs on imported steel and 10% tariffs on aluminum to help what he called the “dead” U.S. steel industry. Trump used his authority under Section 232 of the Trade Expansion Act, which required the Commerce Department to determine that the imports threatened national security.

Initially, Trump permanently exempted Argentina, Brazil, and South Korea from the steel tariffs and instead placed quotas on imports. Australia as also exempt, but without quotas. This year, he lifted the tariffs on Canada and Mexico.

While the tariffs removed some imported steel, it also initially increased prices. Increased production and prices led to significant financial performance improvement from domestic steel manufactures. This led to restarts of existing facilities and announced new capacity.

So, what has this meant for the U.S. steel industry and the US consumer? Has it helped or hurt us? Like most complicated issues, there are likely both benefits and costs. We are going to dive into what has happened and where we see the U.S. steel industry going.

Trade Balance

Imports of steel mill products by volume were volatile in 2018 and year-to-date 2019. However, exports have remained relatively flat for the past 9 years. June 2019 saw the steel trade deficit at 1.3 million metric tons, a 0.2% decrease from May 2019.

Compared to a year ago, in June 2019 the gap in the steel trade balance narrowed by 8.7%. From May to June 2019, the volume of U.S. steel exports decreased to 543.2 thousand, down 5.0%. Year-over-year, June 2019 exports were down 34.5% by volume compared to 2018 and down 26.2% from three years ago.

Imports also decreased by volume, down 1.7% between May and June 2019 to 1.85 million metric tons. Imports for June were down 18.2% year-over-year and 27.7% from three years ago.

The tariffs did seem to work in terms of keeping imports low, but it appears to be more of a result of lower domestic prices. Buyers don’t need imported steel when domestic prices are lower. However, as prices increase, it is possible that buyers will find ways to import from countries not included on the 232 list. The tariffs only apply to about 30% of imports.

Capacity Changes

At the time of the tariffs, U.S. capacity utilization was at 73%. When Commerce Secretary Wilber Ross issued his report to Trump on his investigations into imports of steel and aluminum and his recommendations for tariffs, he said 80% capacity utilization was an important benchmark. The minimum rate that is needed for long-term viability of the industry is 80%.

The increase in prices due to the tariffs prompted capacity additions from major steel mills, including six new mills being announced since 2017 with a combined annual capacity of 7.2 million tons.

Average annual U.S. domestic steel capacity utilization has been trending up in the last two years. In June 2019, capacity utilization was estimated at 80.1%, down 0.7 points from 80.8% in May. However, it was up 2.7 points in June 2019 year-over-year and up 1.6 points from five years ago.

Still, even though capacity utilization has increased 39.3 points from the thirteen-year low in April 2009, it remains well below pre-recession averages.

Domestic demand for steel increased 2% from a year ago, but decreased 9% from five years ago. Yet, demand in June 2019 was 99% higher than in April 2009, the lowest level of demand in recent years.

Looking Ahead

As we look into 2020, the economic outlook is uncertain and increased mill capacity will apply downward pressure on pricing. However, if the new capacity provides the stimulus to shutter old and inefficient capacity, the US steel industry will become stronger. However, Wood Mackenzie, a global energy, chemicals, renewables, metals and mining research group, expects some growth in demand over the next couple years. The demand will be primarily driven by commercial construction and infrastructure.

The tariffs currently do not have an expiration date, it all depends on the 2020 election. However, removal of the tariffs could have a devastating effect on the overall U.S. market place.

Check out our Steel Supply Chain topic for more news on what is happening in the steel industry.

Tony Hammes, Vice President of Supply Chain, contributed to this post.
Metal West Blog

Section 232: What to Know

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Section 232 is part of the Trade Expansion Act of 1962. It gives the president the ability to penalize imports if he decides they pose a threat to national security.

232 Recommendations are Nearing Delivery to the President

The Trump administration said it plans to take “major action” once it receives the U.S. Commerce Department’s report in its Section 232 investigation.

The president has 90 days to review Commerce’s recommendations. However, it is anticipated that he will announce his plan of action within weeks of receiving Commerce’s report. This could include imposing tariffs on top of the current anti-dumping and countervailing duties already in place or imposing quotas that will limit import volumes or a combination of both.

Commerce Delayed Anticipated Determinations

The U.S. Commerce Department modestly delayed its anticipated determinations and recommendations to consider the concerns that have been voiced by manufacturers. Most do not support a potential blanket ban on imports.”

Some manufacturers and trade associations expressed apprehension regarding the investigation’s potential to cut off vital suppliers, greatly effect domestic steel prices, and impact American jobs.

Many even requested that their product, nation, or supplier be excluded from the Section 232 investigation.

Section 232 and National Security Concerns

While Section 232 is framed with concerns of national security, it casts a wider net well outside solely what we would think of as national security matters (e.g., military-related materials or intelligence-sensitive materials). Interpretation includes jobs, job security, ability of metals producers to remain profitable and viable, etc.

Domestic steelmakers have urged Commerce to define “national security” broadly. They would like to it to include not only military goods, but also products used in roads, bridges, and other infrastructure. Mills also said their commercial viability is a matter of national security. If they aren’t profiting, they can’t afford to invest in the research that is necessary to develop future military-grade steel.

Commerce is expected to issue the report by the end of the month.

For more information about the Section 232 investigation, contact your local sales representative.