Is The Steel Bubble About To Pop? - YouTube

Steel is essential it's in everything. Think appliances

like dishwashers and dryers, and fridges and microwaves, or even

air conditioners, not to mention planes, trains and automobiles,

and

every type of manufacturing from machinery needs steel to build

windmills, solar panel systems, certainly to build out the

electricity grid.

When the pandemic threw supply chains into chaos, steel was no

exception, prices dropped, then popped

A boom in steel demand.

Demand is relentless.

I think people feel like steels price will go higher.

I've been looking at this as probably the second biggest

impact to steel makers ever. And I think that the largest impact

is World War Two.

Impending steel shortages become a major problem as America's war

production streamlines into high.

Steel prices spiked 300% over pre pandemic levels, at one

point pricing over $1900. That's up from steel's pre pandemic

price range between $500 and $800.

They have turned into a bubble that and that bubble is they

just go higher because they go higher, we should see prices

move back probably in a pretty violent manner.

Is that the bubble popping?

Yes, yep. Steel is one of those categories, which prices have

really risen dramatically. So certainly one of those examples

of shortages, higher prices, growing frustration among

customers.

Plus steel remains a key material in infrastructure

projects. So the Biden administration's plan to inject

billions into US infrastructure will be a huge boon to the steel

manufacturers.

We estimate that for every 100 billion dollars of new

investment in infrastructure, that's going to mean 5 million

tons of additional steel demand.

2021 steel demand is expected to increase 3.8% over 2020,

according to the World Steel Association.

Can the US steel industry keep up with the demand and what

happens when that bubble pops?

Steel can be manufactured in two ways. First, there's the

integrated method. In the simplest terms, you mine iron

ore, you smelt the ore in a blast furnace with additional

materials like coke, a form of process coal and limestone, and

then you've made steel. But

in the United States today, we actually make 70% of our steel

using a different method, which is what we in the industry we

call the electric arc furnace route.

It's a way of melting down old steel scrap steel into brand new

steel.

Previously blue steel, old carb bodies, refrigerators, steel

that was in old buildings, and that is shredded and melted

down.

Other alloys are added in like some new iron ore and then the

furnaces tipped to pour out the molten steel.

When it comes to clean steel, the US certainly is leading the

way.

But there is work yet to be done to make us steel production emit

less carbon. Two of the US's biggest steel companies, Nucor

and Steel Dynamics, both use electric arc furnaces or EAFs.

If you think about the furnaces, the new cores and the steel

dynamics, they have very competitive cost structures.

They're very flexible in cost. They have a history of really

good financial performance. And certainly their their stock has

increased throughout all of this because higher prices have led

to higher margins, which leads to higher earnings,

but

their stock hasn't moved as much as some of the other ones.

The other ones, Cleveland Cliffs a purveyor of the integrated

method, but they have some EAF mills too. And there's US Steel.

The people that have moved the most though has been Cleveland

Cliffs and US Steel. The market has been very challenging. It's

been very competitive. And they've had to take on an

increasing amount of debt leading up to the pandemic just

to continue on. And then because of the structural change in the

market, these mills earning excessive to historical norm

margins, they've been able to pay down debt, pay off debt or

buy back billions of dollars o shares. So the steel mills real

y are a different company tod y than they were two years ag

Steel prices are good, and they will continue to be strong. It's

all about demand. We have limited supply, and people want

things done right now. So that creates competition. That's the

basis of capitalism will continue to work to reward our

shareholders and to generate the cash that is necessary to

reinvest in our business.

The coronavirus pandemic definitely had an impact on the

steel industry. Now steel producers were generally

identified as essential industries so they weren't shut

down by any government action. But many of our customers saw

big drops in demand for instance, in the auto industry

which buys maybe 25 26% of all the steel produced in the United

States every year, largely shut down in the spring of 2020. And

a lot of construction projects were slowed, everything. So

demand for steel dropped precipitously between the middle

of March and May, so much so that steel producers in the US

responding to that market signal did reduce production

dramatically. We had a number of steel mills that shut down

altogether.

Steel production went way down, and inventories depleted, and

then demand started picking back up.

So we've seen a huge, huge increase in demand. So much so

that you know, steel production today is up 60% over where it

was at the low point back in May of 2020.

The economy began gaining steam in late 2020 as vaccines began

to roll out.

We have seen with this pandemic, locking things down and coming

out of the lockdown was that there truly was a shortage,

buyers could not get as much steel as they required just for

normal operations outside of nobody was able to hoard steel,

nobody was able to build any inventories because the mills

were limited in terms of how much of each contract they could

they can satisfy and they weren't selling much less than

their their contractual volumes just because of this shortage.

And then when demand came around you back distributors were

caught short and then everyone started ordering steel at the

same time. And it does take some time to make that steel. So our

plants started coming back as quickly as they could.

The US also imports a ton of steel.

China is easily the world's leading manufacturer of steel.

So we import a lot of them, we benefit from those low prices.

But again, those tariffs have been in place, and that causes

prices to rise. I'm not saying those tariffs are a good thing

or a bad thing. I'm simply saying that they would tend to

drive up price and they have done that.

The US is the world's largest net importer of steel. Steel

imports are up 17.5% year to date as of August 2021, the US

imported more than 16 million metric tons of steel so far in

2021 as of July. But depending on which country these imports

come from, there's a tax on the steel imports, aka tariffs.

In 2018. President imposed across the board steel tariffs

as a national security measure because they were, the concern

was that the levels of imports coming in were undermining the

viability of the industry over the long term.

President Trump said the increase in imports posed a

threat that could drive US producers out of business,

leaving the country dependent on foreign suppliers. Then he

exempt big trading partners Canada and Mexico from these

tariffs.

When the Trump administration first started to implement those

tariff increases, there was a big squeeze on domestic steel.

So all of a sudden, people said I don't want to pay those

tariffs. I want us manufactured steel. And part of that was

because it just there was this notion of this is by American,

let's produce more here. But what happened of course, when

foreign steel prices go up, the masses steel prices go up. Steel

prices were rising significantly during much of the Trump

administration. And of course, the pandemic.

Customers buying steel felt the impact of both the high prices

and tariffs. On the flip side,

I will say the one good piece of news is because we had those

steel tariffs in place in 2020. The COVID-19 crisis could have

been another demand shock, very similar what happened in the

late 1990s. Or in 2008, 2009, we could have seen a new surge in

imports because when imports come in at very high levels,

they tend to undercut domestic producers, they often sell at a

loss in this market what's called dumping.

Dumping is when other firms or countries come into another

country's market and dump products at artificially low

prices.

We put tariffs on all the crap that they were dumping from

China 25%, they were dumping the steel than we said you can't do

that.

So dumping makes it hard for us manufacturers to run mills at a

profit.

But because we had those tariffs in place, that didn't happen.

And so the industry remained healthy, was able to recover,

continue its investment and be in a strong position to meet the

growing demand that we see today. You want to be running

your steel mill as close to full as you can to really cover those

fixed costs. Plus, you really want to be running at least 85%

capacity utilization, which is where we are today. But back in

those years before the steel tariffs were imposed, we were

running only in the low 70% range. And that was really an

unsustainable level for us. That was because of the high level of

imports coming in in those years.

Tariffs also created an environment that incentivize the

US industry to invest in its facilities.

We've spent close to $16 billion dollars, just since 2018. And

investments in new facilities and upgrading existing

facilities.

We do have pretty substantial amount of new capacity that's

coming online that was in planning to be built for the

past few years. They're coming online in Texas and Kentucky and

in Toledo, Ohio. As that comes online, we expect prices to move

back towards a more historic norm.

I think what really comes next is the mills are going to be

earning incredible profits this year, most of next year.

We have already made in revenue more than $9 billion this year,

in six months infrastructure bill will be an icing on the

cake.

And I think what's next, it really is how are they going to

be investing those profits? What are they doing with it?

For a long time was to continue and invest in the down cycles to

create higher highs and higher lows. So the mills that are

coming up online now are benefiting from that.

As for steel prices in the US,

There's a supply deficit that's supported prices, and that

supply deficit is easing going away. And as that happens, we

should see prices move back probably in a pretty violent

manner, at least in the start, maybe a 15 to 20% drop in a

matter of a month. And as that happens, prices will then be on

there trend line down back towards more historic levels.

Is that the bubble popping?

Yes, yep.

We see we see prices peaking here. And that really, it should

be in this half of this year.

I don't know that I would say that we're in a bubble that's

going to be burst. I think we're going to see continued strong

demand.

The good news is that steel supply capacity will rise over

time a cure for high prices is high prices. So when steel

prices are high, that creates an incentive for suppliers to

increase output and eventually capacity. I think you're going

to see that happen. And so we hopefully will see lower price

at some point in the future, even as the world continues to

use more steel.