Steel Products Prices North America

Tanners Predicts “Steelmageddon” as Overcapacity Devastates Steel Prices

March 17, 2019

Steel market conditions and steel prices could be good for the next 18-24 months, but after that comes an unavoidable downturn that metals and mining analyst Timna Tanners has dubbed “Steelmageddon.”

In fact, her company, Bank of America Merrill Lynch, has trademarked the term. Speaking at the S&P Global Platts North America Steel Conference March 14 in Chicago, Tanners warned the crowd of the changes almost certainly to come. “I think this is quite transparent, the most transparent train wreck I have seen in my career, and it’s headed right for us. There’s going to be a glut that will shake up the industry.”

Flush with cash following a hugely profitable year, domestic steelmakers have announced dozens of capital investments, from restarts to greenfield projects, estimated to add 20-24 million tons or about 20 percent more steel capacity to the U.S. market over the next four years. Steel demand, on the other hand, could decline in the same timeframe. “The risk of a slowdown in demand is real, not just in the U.S. but in China,” Tanners said. “When you get a lot of new capacity without a corresponding increase in demand, you see prices fall. When prices fall, there will come a day of reckoning for the higher cost capacity.”

Integrated mills most likely will be forced to shutter older, less efficient blast furnaces. Minimills, with their electric arc furnaces, will see an acceleration in their market share gains. The prices of iron ore and met coal used by the BOF mills will fall, while the scrap, DRI, HBI and pig iron used by the EAFs will rise. “The ongoing trend toward EAF production will mean a lot more demand for scrap and scrap substitutes going forward. It’s a natural evolution, accelerated by a year of really good steel prices,” Tanners explained.

Bank of America Merrill Lynch’s forecasts presume the Section 232 tariffs will remain in force. “Our view is that trade protection will probably be sustained so long as the current administration is in place,” Tanners said. But if the trade measures currently holding imports at bay are removed as steel capacity spikes, the effect on prices could be even more dramatic.

The worst case for Steelmageddon assumes a confluence of lower prices, weaker demand and removal of the trade protections, along with a major oversupply of the market. In such case, steel prices could plunge to near the marginal cost of production around $500-550 per ton by 2022, Tanners said.

In the near term, she is relatively optimistic. Bank of America Merrill Lynch forecasts that the benchmark price for HRC will jump to $775 per ton in Q2 before moderating later in the year. But 2019 should be another good year overall as prices will get support from lean inventories, sparse second-quarter imports, improving seasonal demand and a cost push from higher iron ore pricing. After that, the new capacity could begin to knock the supply-demand balance out of whack.

Said Tanners: “Steelmageddon is probably 24 months away and I don’t think there is anything that can stop it.”

Tanners will be a featured speaker at the 2019 SMU Steel Summit Conference Aug. 26-28 in Atlanta.