2018 Year in Review; What Does It Mean for 2019?

Fast forward to new year 2019. The benchmark price for hot rolled is now around $745 per ton, an 18 percent drop from the peak last July. The market is hopeful steel prices will bottom and see a seasonal bump in the first quarter, but reports of a slowdown in China, conflict over Brexit in Europe and the rout on Wall Street are weighing heavily on steel buyer sentiment.

Ferrous scrap prices will play into steel prices in 2019. Scrap witnessed the same ups and downs as finished steel last year. The price for shredded scrap began the year at $328 per ton, spiked to $380 by April 1, then slid back to where it started over the next five months. Prime grades followed the same basic trajectory. In the fourth quarter, shred prices rebounded a bit to around $365 per ton, but weakness overseas and signs that steel demand and production may ease in the U.S. leave scrap’s direction difficult to predict.

Through all the volatility of 2018, the saving grace was steel demand that seemed almost too good to be true. Demand that allowed U.S. mills to crank out steel at more than 80 percent of their capability in the fourth quarter. Some of that was the result of the Trump tariffs, which cut imports by about 10 percent last year. With steel shipments up by 4-5 percent at the same time, domestic mills saw their market share increase. But most of their success can be attributed to the surprisingly resilient American economy.

What are the prospects for the economy in 2019? Corporate purchasing executives surveyed by the Institute for Supply Management are optimistic about business conditions this year. They expect revenues to increase in 17 manufacturing industries.

Strong construction spending in 2018 holds promise for further steel demand in 2019, but the sector is not without its challenges. “Construction spending has increased among nearly every project type and geographic area this year,” said Ken Simonson, chief economist for the Associated General Contractors of America. “Despite month-to-month fluctuations, the outlook remains positive for modest to moderate increases in most spending categories at least through the first part of 2019. However, damaging trade policies, labor shortages and rising interest rates pose growing challenges to contractors and their clients.”

Slowing automotive sales are a source of concern for steel suppliers. But the U.S. auto industry topped the 17 million vehicle mark for the fourth year in a row in 2018 and most forecasts predict sales in the upper 16 million unit range for 2019—still extremely healthy by historical standards.

Steel demand from the energy sector is at the mercy of volatile steel prices, With oil prices dipping below $50 per barrel recently, new drilling is questionable in the near term. Still, oil pipeline capacity in the nation’s shale plays is inadequate and energy companies have committed billions to new and expanded pipelines over the next several years to relieve the bottlenecks.

On the trade front, all eyes are on the new U.S.-Mexico-Canada Trade Agreement, which has been signed by the three nations but must still be ratified by their legislatures. A major stumbling block to final passage of this so-called “free trade” agreement is the tariff the Trump administration maintains on imports of steel and aluminum from Canada and Mexico. Without some form of compromise, the whole agreement could collapse, with negative consequences for commerce in North America, warn some experts. Withdrawal of the tariffs, or even their replacement with some sort of quota, promises to open the borders and increase the steel supply in the U.S., which would likely add to the downward pressure on prices.

The U.S. could see more Section 232 tariffs on imports of autos and auto parts in 2019, with Commerce Department reports due early this year. Commerce continues to grapple with the thousands of exclusion requests filed over the steel tariffs by companies that claim there is no domestic source for the particular steel they require. After much confusion over the exclusion process and the criteria being used to assess claims, Commerce appears to have made some headway. The government reportedly has granted about 75 percent of the exclusion requests so far, removing the tariffs on roughly 16 percent of the finished steel entering the U.S. But the ongoing process has proven disruptive and costly to many U.S. manufacturers.

The American Institute for International steel and two of its member companies (importers of steel) have challenged the constitutionality of President Trump’s Section 232 tariffs. The Court of International Trade is expected to rule on the case this spring.

Trump’s tariffs are very popular among steel executives, but quite the opposite among steel-consuming sectors. Researchers at The Tax Foundation emphasize that the tariffs ultimately increase consumer prices and effectively are a tax on American households. Section 232 and Section 301 tariffs on steel, aluminum, washing machines and $250 billion worth of imports from China amount to a tax hike equivalent to about $42 billion, they estimate. And President Trump has proposed additional tariffs on Chinese goods as leverage to force China to change its predatory trade practices. The outcomes of trade negotiations with China in 2019 have major implications for the U.S. economy.

In other notable 2018 headlines, General Motors angered the administration when it revealed its plan to shutter five North American assembly plants by the end of 2019, impacting 6,300 jobs. GM cited slowing sales and the tariffs on aluminum and steel as challenges facing the auto industry. GM estimates the tariffs raised its material costs by $1 billion in 2018.

Many corporations took their windfall profits from the Trump tax cut and used them to repurchase their own stock, rather than investing in new job-creating ventures, as the administration had hoped. To their credit, several leading steel producers also announced plans to invest in new plants and equipment in 2018. To cite a few examples:

• JSW USA made a splash with its billion-dollar commitment to the U.S. market. The India-based company just completed a successful restart of the long-idled Mingo Junction mill in Ohio and has broken ground on a new EAF mill adjacent to its pipe plant in Baytown, Texas.

• Nucor has made a $650 million commitment to expand the production capability of its Ghent, Ky., to transform the former Gallatin Steel plant into an ultra-modern “quality strip production” plant. Nucor also announced plans to build a new $240 million galvanizing line at its Arkansas sheet mill.

• U.S. Steel restarted the second of two blast furnaces at its Granite City Works in Illinois.

• Steel Dynamics acquired the CSN Heartland Flat Roll operations in Terre Haute, Ind., and the idled Kentucky Electric Steel bar mill in Ashland, Ky.

• North Star BlueScope is expected to make a decision next month on whether to proceed with a $500 million to $700 million investment that could add a third EAF and a second caster to its Delta, Ohio, mill.

The service center sector continued to consolidate in 2018. How much is difficult to measure because deals between privately held companies often go unreported. But a few high profile mergers suggest the trend still has some legs. Two venerable Chicago-based metals distributors joined forces when Ryerson agreed to acquire Central Steel & Wire Co. Nebraska’s Norfolk Iron & Metal strengthened its foothold in the west with its acquisition of O’Neal Flat Rolled Metals. Olympic Steel continued its string of acquisitions with the purchase of Berlin Metals, the Hammond, Ind., service center, just to name a few.

President Trump also proposed easing the vehicle emissions standards for passenger cars and light trucks last year. Rolling back the Obama-era CAFE mark of more than 50 miles per gallon by 2025 would help automakers meet a new, lower government standard, but at what cost to the environment? And at what cost to steel demand and the further development of new lightweight advanced high-strength steels?

Like few other periods in history, politics is altering the normal steel business cycle, making the future weeks and months much less predictable. President Trump’s “America First” trade policies and corporate tax cut heated up the U.S. economy in the first half of 2018, but while the kindling burned brightly for awhile, the log may not have caught fire. The side effects of the Trump administration trade policies will have an outsized impact on the economy, and the steel industry, in 2019.