Now hardly seems the ideal time to restrain the supply of an essential commodity. But that is the perverse outcome for the US steel market as a roaring economy collides with holdover protectionism.
President Donald Trump had imposed a 25 per cent tariff on steel imports in 2018 in an attempt to appeal to his political base. But this year demand for durable goods such as automobiles has surged so much that steel prices of about $1,500 a ton are three times higher than a year ago.
Even so, America’s steel industry sees no reason to give anything back. The sector has shrunk capacity and consolidated, leaving fewer, more efficient operators with greater use of automation. The workforce, despite being depleted, has retained residual power through its politically connected unions. In a recent letter to Biden, steel advocates argued that supporting a domestic industry has led to greater investment and job creation. Even if prices and supply are temporarily high, the threat of overproduction from China and elsewhere remains.
No surprise that the stock prices of US Steel, Nucor, and Cleveland-Cliffs have soared, doubling so far in 2021. As President Joe Biden looks to ease tensions with allies and pursue sounder economic policies, Trump’s tariffs may be heading for the chopping block. Still, the politics of such a decision are dicey and complicating matters.
Favouring an input industry means disadvantaging downstream customers. Manufacturers such as General Motors have complained about prices and shortages for semiconductors and raw materials such as steel. But, so far, makers have passed on costs to their end-consumers. Separately, those tariff-targeted countries can choose to retaliate. The EU has threatened to do just that but has held off taking action as negotiations get under way.
US Steel said its adjusted ebitda hit a whopping $551m in the first quarter, a remarkable $750m swing from just three quarters ago. The company is signalling an even stronger second quarter. Still, analysts expect commodity prices to moderate eventually either as supply increases or demand slows. Nucor’s ebitda valuation multiple has compressed towards its historical lows suggesting markets have doubts about steel prices too.
Another boost for the steel sector may come following the passage of a trillion-dollar infrastructure package. A more modest golden age of steelmaking may have arrived, making it the ideal time for Uncle Sam to stop tilting the scale in the makers’ favour.