U.S. Steel Output Continues to Leap as Recovery Strengthens

U.S. raw steel production continues to expand on a weekly basis on sustained improvement in capacity utilization. According to the latest American Iron and Steel Institute ("AISI") weekly report, domestic raw steel production was 1,502,000 net tons for the week ending Oct 10, a 1.2% increase from production of 1,484,000 net tons for the week ending Oct 3. This follows a 0.3% increase on a weekly comparison basis for the week ending Oct 3 and a 2.4% rise for the week ending Sep 26.

Despite the weekly increase, production still lags the year-ago level. Production for the reported week was down 16.8% from 1,805,000 net tons registered for the same period a year ago.

Weekly Utilization Improves

Capacity utilization — a key metric in the steel industry — was 67.9% for the reported week, rising from the previous week’s reading of 66.6%, indicating an improvement in activity. However, it was still well below the key 80% threshold — the minimum rate required for sustained profitability of the industry. Capability utilization rate for the reported week was down from 78% a year ago, per AISI.

Notably, capacity utilization rate plummeted to 51.1% in May — the lowest level in many years — after remaining above the 80% the level in early 2020 as the coronavirus pandemic squeezed demand across major steel-consuming markets. Utilization has started to pick up with a rebound in steel demand from the slump witnessed during the first half of 2020.

Meanwhile, adjusted year-to-date production through Oct 10 was 60,946,000 net tons at a capability utilization rate of 66.2%, down 19.5% from 75,741,000 net tons registered in the same period a year ago, AISI noted. Capability utilization rate for the period is also down from 80.1% recorded last year.

By regions, production from Great Lakes rose roughly 1% on a weekly basis to 538,000 net tons in the reported week. Production in the Southern region went up roughly 3% to 592,000 net tons. North East saw a 2% increase in production to 147,000 net tons for the reported week. Mills in the Midwest region produced 154,000 net tons of raw steel, down around 8% from a week ago. Production rose roughly 8% in the Western region to 71,000 net tons.

Demand Revival, Price Upswing Buoy Prospects

Coronavirus has dealt a fresh blow to the U.S. steel industry, which reeled under the effects of a sharp decline in domestic steel prices and the U.S.-China tariff war last year. The pandemic decimated demand for steel across major end-use markets such as construction and automotive during the first half. Moreover, a slump in crude oil prices hurt demand for steel in the energy space.

The virus-led demand destruction also forced U.S. steel mills to scale back production and idle operations with capacity utilization plunging to a multi-year lows during the first half. Moreover, a slump in demand led to a downswing in U.S. steel prices.

The benchmark hot-rolled coil (“HRC”) prices tumbled to below the psychologically important $500 per short ton level in April on concerns over the fast-growing pandemic in the United States and demand slowdown amid production shutdowns by automakers. After gaining some traction during the second quarter, steel prices again came under significant pressure in July and August on demand weakness.

However, HRC prices started to recover in September and are on an upswing this month. Prices have surged past $600 per short ton on U.S. steel mills’ back-to-back price hike actions and a recovery in end-market demand, especially in automotive.

According to SteelBenchmarker, the benchmark prices for hot rolled band steel hit $616 per net ton on Oct 14, up roughly 9% from $564 net ton two weeks ago.

Lead times for steel delivery at U.S. steel mills remain extended (indicating healthier demand) while steel scrap prices are on the rise. Improving demand coupled with tight supply due to production disruptions and mill outages are likely to lend support to HRC prices through the final quarter of 2020.

Meanwhile, a recovery in market conditions from the virus-led slump augurs well for the U.S. steel industry. Demand for steel has picked up with the resumption of operations across major steel-consuming sectors, following the easing of restrictions.

In particular, the U.S. automotive industry has gotten back on its feet following coronavirus-led shutdowns on the back of a strong recovery in customer demand. U.S. auto sales have rebounded sharply after hitting a coronavirus-induced low in April, aided by cheap borrowing costs, rising consumer confidence and increasing inclination towards private transportation amid the pandemic. U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships in the face of surging demand. The rebound in the domestic automotive industry represents a tailwind for the U.S. steel industry.

Notably, major U.S. steel producers have provided upbeat outlook for the third quarter based on improving market conditions. Nucor Corporation NUE last month said that its downstream products segment witnessed a strong third quarter driven by the resiliency of non-residential construction markets. Its bar and structural mills also gained from non-residential construction markets. Utilization rates for its sheet mills also improved throughout the third quarter.

Moreover, Steel Dynamics, Inc. STLD expects to benefit from higher shipments in the third quarter driven by improved automotive and strong construction demand. It also noted that the pricing of flat-roll steel has stabilized and improved during the second half of the third quarter, aided by favorable customer demand.

United States Steel Corporation X also expects market improvement to support its third-quarter results. The company has responded to an improving order booking by restarting three blast furnaces, which it temporarily idled in response to the coronavirus pandemic.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are Schnitzer Steel Industries, Inc. SCHN and L.B. Foster Company FSTR. While Schnitzer Steel sports a Zacks Rank #1 (Strong Buy), L.B. Foster carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Schnitzer Steel delivered an earnings surprise of 41.3%, on average, over the trailing four quarters. The Zacks Consensus Estimate for the current year also has been revised 3.2% upward over the last 30 days. The company’s shares have also gained roughly 18% over the past three months.

L.B. Foster delivered an earnings surprise of 4,200% in the last reported quarter. The consensus estimate for the current year also has been revised 2.9% upward over the last 30 days. The stock is also up roughly 9% over the past three months.

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