Millett: New Capacity, Imports Won't Slow U.S. Steel Market

Demand in the meantime remains solid almost across the board, inventories low, and prices show few signs of cracking, they said.

“We remain incredibly bullish for the rest of this year and going into next year – absolutely no doubt about it,” SDI President and CEO Mark Millett said during SDI’s second-quarter earnings conference call on Tuesday, July 20.

“There seems to be this cloud over people’s heads. But we’re in the trenches talking to customers each and every day. … And I think we have a good finger on the pulse. And it’s got legs,” he said of record steel prices and demand.

Millett made the comments after the Fort Wayne, Ind.-based steelmaker on Monday posted record second quarter profits and predicted even better times in the third quarter.

Take the automotive sector. Yes, the chip shortage has slowed auto production. But with pent-up demand strong, the main impact of the shortage will be to extend firm auto demand longer than otherwise would have been the case.

“We can’t make enough steel. … particularly on the automotive side,” Millett said. “If you talk to the large dealers out there, they just cannot get enough product. And they would suggest it’s going to be a couple of years before they actually catch up.”

It’s not just automotive demand that’s strong. So is demand from construction (both residential and nonresidential), yellow goods and energy exploration. The only laggard is in the pipeline sector, where the cancellation of some large projects has impacted steel demand, he said.

And it’s not just sheet products that are seeing record high prices. Long products have joined in on the action. Long product prices had been moving in “lockstep” with scrap prices. That’s unlike sheet prices, which long ago disconnected from scrap prices and have moved up significantly more than higher scrap costs.

“The long products markets have gotten incredibly hot here of late,” Millett said. The result: Long product pricing now moves like sheet, not up with scrap prices but up with what the market will bear.

And it’s not clear what might send steel prices the other way, especially with inventories still low by historical standards. “People just can’t get enough steel to satisfy their immediate needs domestically,” Millett said.

Imports don’t provide much relief either. The gap between domestic prices and prices abroad might be attractive on paper. But the reality is that demand is strong and supplies are limited overseas as well. And imports ordered now won’t arrive until November-January, which is further out than most buyers are comfortable with. “People don’t want to take that risk,” he said. “So I don’t see any (inventory) rebuild in the interim – and that’s just another factor that’s going to extend the cycle.”

Nor is there relief coming from new capacity. SDI’s new mill in Sinton, Texas, has delayed its startup to the fourth quarter because of severe weather in the region. And other mills expanding capacity will need to take outages in the fourth quarter of this year or the first quarter of next to install new equipment – meaning capacity will get tighter before it expands, he said.

And those one-time outages for equipment installations come on top of regularly scheduled fall maintenance outages. SDI’s flat-rolled steel mills in Butler, Ind., and Columbus, Miss., for example, still plan to take their normal outages in the second half, Millett said. “There is going to be a lot of steel coming offline in the second half, which will tighten the supply-demand balance even more,” he said.

Those factors support steel prices remaining high in the short-term. And domestic demand in general should remain strong over the longer term thanks in part to trade policies – consistent across the Biden and Trump administrations – aimed at limiting imports.

That’s true even if Section 232 “goes away.” Section 201 protections on steel intensive goods – put in place in 2017 on imported washing machines and solar panels – should continue to protect the domestic industry. And the U.S.-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (Nafta), has led to European energy firms sourcing steel from within the region instead of from overseas, Millett noted.

Another bogeyman – new capacity – is needed just to fill the void left by idled integrated capacity. The U.S. has production capacity of 95-100 million tons per year and consumes at least 120 million tons in a normal market. And that gap between domestic production and consumption won’t be filled by imports to the same extent it was in the past. So, “I am not concerned about overcapacity one little bit,” Millett said.

The main problem is that analysis of the domestic steel industry has been focused on the the next 6-12 months – and not on the longer-term paradigm shift underway in steel, Millet said.

“The market is changing in this country, and it needs more capacity,” he said. “And (that capacity) will benefit the North American manufacturing base going forward.”

In other words, new capacity – especially state-of-the art capacity with a low-carbon footprint – is exactly what the doctor ordered, he said.

By Michael Cowden, Michael@SteelMarketUpdate.com