U.S. steel stocks are having a rough go amid the ongoing U.S.–China trade war. Escalating trade tensions have begun to weigh on global growth, depressing global steel demand. Meanwhile, although the Trump administration’s implementation of steel tariffs last year helped shield the U.S. steel industry from foreign competition, the industry’s investments in new, more efficient capacity is creating an excess supply of steel, creating a situation that Bank of America has dubbed “Steelmageddon.”
Amid the steel supply glut brought on by excess capacity, the “mother-of-all price wars” is looming, warned the bank’s analysts during this week’s SMU Steel Summit, according to a recently issued research note. Steel prices are indeed falling and the stocks of steel companies are tanking.
What It Means for Investors
Contrary to President Trump’s claim that the steel industry is “thriving,” the last two months has seen industry layoffs and plant closures amid lower steel prices. While prices soared last year after the president imposed tariffs that limited steel imports, and the last two months has seen some upward momentum, weakening demand and excess supply has been weighing on prices for most of the year, according to Market Realist.
Trump’s 25% steel tariffs levied last year initially benefited the long-struggling domestic industry, shielding manufacturers from international competition. The tariffs renewed optimism and pushed the industry’s capacity above 80%, the minimum threshold required to sustain profitability, according to Nasdaq.
To meet the increase in demand, newly added capacity replaced old, obsolete capacity, causing an improvement in production efficiency. Bank of America expects steel capacity to increase 20% by 2020. With supply flooding the market, domestic players will battle for market share by pushing down prices. Steel prices are well below their July-2018 peak of around $920 per short ton.
Weaker demand has also weighed on prices. Uncertainties surrounding global economic growth have led to softer demand across the U.S. and Europe. Slowdowns in major end-use markets of steel, such as automotive, construction and energy, are contributing to the slack. The slowdown in China amid escalating trade tensions has led to weakness in the construction and automotive markets, two of the country’s primary end-use markets for steel.
Adding to the misery of the U.S. steel industry was last year’s signing of the United States-Mexico-Canada Agreement (USMCA) to replace NAFTA and the subsequent dropping of tariffs on both Mexico and Canada earlier this year. Further tariff exemptions on other countries could do even more damage. While U.S. steel imports are still down for they year, reflecting the impact of tariffs, they did happen to surge roughly 48% in July from the previous month. That’s not a hopeful sign for American steel.