USA UPDATE
consumption that is a strong driver of economic growth. After recording strong growth in 2018, Northwest Indiana’s economy is staring at an uncertain future. ArcelorMittal’s example illustrates how that steel giant reaped an incredible $5.1 billion profit in 2018; indeed, ArcelorMittal USA has enjoyed an incredibly successful run since 2007. US Steel had tripled its annual profit to $ 1.1 billion, its best result since 2008. Things are different for the two steel companies today. Steelmakers depend heavily on demand from the steel-consuming industries such as automotive and construction. The automotive business is passing through difficult times. Growth has also slowed down in non-residential construction, another big end user of steel products. This is also due to the fact that an infrastructure programme put together by the US Congress and the last two administrations is “lying frozen”, as some steel experts call it. Meanwhile, prices of iron ore and other materials have surged upward along with steel prices. The service sector has been weak in buying steel, with economists even uttering the dreaded “R word” – recession, to be sure. Steelmakers are also nervously watching the workers’ strike at General Motors, a major steel-consuming industry. There is delicious irony in the fact that while Section 232 tariffs were imposed to curb cheap steel imports and thus prop up domestic steel prices and profits of steel companies, the steel prices today are lower than in March 2018 when tariffs were imposed.
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US Steel, according to steel industry sources, has allocated $2 billion to carry out long overdue modernisation of its aging facilities, including $750 million at its Gary Works. The company needs a new hot strip mill while its blast furnaces are also old. Over recent months, the industry’s mood has been dampened and marks a sharp contrast with the sentiments of last year when optimism prevailed and some steel executives, notably Nucor Corporation’s John Ferriola, loudly proclaimed that it was the “best time to make steel in the United States”.
The situation has changed dramatically now – from booming profits and resumption of operations in steel plants in 2018 to lower demand, falling prices and tumbling profits in 2019. The US steel industry faces oversupply, lower demand and falling prices, which affect the profitability of steelmaking plants – Nucor, SDI and US Steel have been warning that falling prices are expected to squeeze their third quarter earnings compared to the yearearlier period. This also contrasts sharply with remarks made by steel executives at events last year, including the New York Steel Success Strategies 2018 conference when they were mouthing optimism and confidence after Trump’s introduction of tariffs.
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The continuing US-China trade war has hit US manufacturing. Economic growth has slowed down and companies are taking a wait-and-watch approach on hiring new workers. One conspicuous anomaly is that declining imports, attributed to tariffs, have not helped prop up prices or sustain the domestic boom for long. What many in the US fail to understand – and this is particularly true of some politicians – is that we live in a globalised world. Huge global supply chains have been created to address specific demands. While globalisation has cut through the borders, it has also led to an intertwining of entire economies, making each dependable on the other. In short, if you try to hurt a supplying country, you also, eventually, end up hurting yourself. Shooting yourself in the foot? Quite so. If you try to create obstacles for foreign suppliers of cheaper products in order to protect your domestic steelmakers, you also hurt the steel-consuming sectors who will be forced to buy – the more expensive – locally-produced steel and, in the bargain, will raise their prices which are passed on to the average consumer. The end result: demand slackens and there is pressure on prices. Steel-manufacturing companies made the miscalculation, in the wake of last year’s post-tariff boom, by hastily boosting their production, but falling demand from industrial customers has hurt the prospect of increased output and their profitability. Meanwhile, the Federal Reserve chairman Jerome Powell recently acknowledged that business investments and exports have weakened amid falling manufacturing output. In his view, the main reasons appeared to be slower growth abroad and trade policy developments – two sources of uncertainty that were monitored by the Fed. Indeed, the macroeconomic outlook does not appear very bright for steelmakers in 2019, as some analysts are saying; this may be due, partly, to ongoing trade friction and the resulting global uncertainty. The coming weeks will provide some interesting pointers for the future. � October 2019
09/10/2019 10:00:34