Falling demand for steel not likely to reverse any time soon

It's been a rough time for American steel makers.

U.S. Steel has moved to close plants and lay off thousands of workers. Ohio-based AK Steel warned investors this month that it expects a first-quarter loss because of a 14 percent decline in shipments. Falling steel demand is cutting into profits at major producers such as Indiana-based Steel Dynamics and Nucor, in Charlotte.

And matters don't look like they'll improve soon.

“For steel makers, 2015 is likely to be a challenging year,” said Andrew Lane, an equity analyst at Morningstar.

U.S. steel companies are struggling against a combination of lower oil prices, oversupply and excessive imports fed by a strong dollar. Those headwinds have become a perfect storm that could lead to more idled plants and layoffs, and spur a major international trade case against China, which steel makers accuse of undercutting the market with artificially low-priced product.

As the U.S. economy gains steam, the nation's steel makers are struggling.

“It's not a case where I think the U.S. is losing momentum; it's more of a case of being an idiosyncratic thing,” said Philip Gibbs, an equities analyst with KeyBanc Capital Markets in Cleveland.

The industry has been hurt by slackening demand from energy producers, which account for 10 percent of the domestic steel market. Increased U.S. shale production and low demand have driven a glut of both oil and gas that has pushed prices of both commodities to multiyear lows. Energy companies have responded by paring capital spending and buying less steel for drilling and pipeline projects.

U.S. Steel has been hit especially hard. Rolling steel to make pipes for oil and gas drillers made up a bigger portion of its business before energy firms slowed activity this year.

U.S. Steel pushed heavily into products that served the industry during the boom times and has since closed pipe-making plants, including one near St. Louis that the company said Wednesday would be temporarily idled.

The nation's largest steel company has closed or idled plants in Ohio, Indiana, Illinois, Texas, Minnesota and Alabama in recent months and announced this week that it will close a plant near St. Louis. Last year, U.S. Steel idled its tubular works plant in McKeesport because of slowing demand.

U.S. Steel executives have expressed the greatest concern about cheap imports. On Thursday, CEO and President Mario Longhi testified before the Congressional Steel Caucus and warned of long-term damage to domestic steel makers from what the industry says is illegal dumping by foreign companies.

“Today, across the country, once again, mills are idled. Plants continue to be shut down. American workers are laid off,” Longhi said. “American steel companies are being irreparably harmed by illegal trade practices.”

The dollar's strength against foreign currencies has made U.S. steel more expensive abroad, and foreign imports cheaper for domestic manufacturers to buy. Plus, there is a glut of product coming from China.

China's state-subsidized industry continues to pump out steel, even as demand slows at home. That has led to surging exports, particularly to the United States. China's finished steel exports to the United States rose 26 percent in February from a year ago, according to the American Iron and Steel Institute.

Steel makers blame the government-subsidized Chinese industry for unfairly “dumping” steel, or selling below the cost of production to gain market share in foreign countries. Spot steel prices have fallen 20 percent in the past year and may remain barely above the cost of production the rest of 2015, Lane said.

Dumping is illegal under international trade law, and domestic steel makers are beginning to take their case to Washington.

Bringing a trade case may not yield the benefit that steel makers are hoping for, Lane said. Steel makers last summer won a dumping case against six nations, including South Korea and Turkey. But the penalties levied by the federal Department of Commerce have done little to curb their activity.

South Korean exports to the United States in January and February were up 60 percent from the same period a year ago, and imports of Turkish steel were up 78 percent.

“Even though (the International Trade Administration) agreed with the petitioners that South Korea was engaging in illegal trade practices, the penalties weren't high enough do discourage them,” Lane said.

Even still, a trade case against China appears inevitable, possibly even in the spring, Lane said.

Chris Fleisher is a staff writer for Trib Total Media.