Fitch Ratings: Tariffs Help US Steel Prices but Fabrication Margins Fall.
We expect fundamentals in the US steel market to remain favorable over the near term, given healthy demand, relatively low inventory, improved capacity utilization and a low risk of material domestic capacity expansion. US Steel company's (BB-/Positive) credit profile is being supported by a combination of improved profitability, positive FCF, further cost reduction and efficiency efforts, and debt repayments. Margins on fabricated products are being pressured but consolidated operating results for Commercial Metals, Steel Dynamics, and Nucor remain strong.
CRU provided a mid-year update on the North America steel market this week. The company expects sheet consumption to rise in 2018 and to be flat in 2019, given the potential lag effect of tariffs on industrial production. CRU projects prices will decline moderately through the rest of 2018, due to seasonal factors and timing of customer orders. US hot-rolled coil prices are up sharply to more than $1,000/ton month-to-date versus an average of $680/ton at YE 2017, while domestic hot-rolled coil consumption is up 2.5% YTD, after rising 3.1% in 2017.
We do not anticipant significant demand destruction in the US, even with growing concerns in the business community about the adverse effects of tariffs and warnings that capital projects could be delayed as trade tensions rise. However, should retaliatory actions continue to escalate and the Section 232 investigation for automobiles and parts lead to additional US import tariffs, risk to our assumptions could rise.
In response to the Section 232 tariffs applied by the US, Mexico, Canada, and the EU have all imposed retaliatory tariffs on steel products imported from the US effective June and July. Moreover, the Center for Automobile Research estimates annual unit sales could fall by 12%, or 2 million, if a 25% tariff is applied to all imports and the average final price of a vehicle sold in the US rises by an estimated $6,875.
In mid-July, the EU put temporary safeguard measures which will impose a 25% import tariff on 23 steel product categories once certain conditions are met in place. The EU safeguarding measures may potentially benefit US Steel company and Commercial Metals, which have strong performing operations located in the EU.
On Monday, the US increased import tariffs on Turkish steel to 50% from 25%. We believe this could support domestic rebar pricing if rebar imports from Turkey become less competitively priced even with a weaker Turkish lira, potentially benefiting Commercial Metals, Steel Dynamics, and Nucor's rebar operations and offsetting margin pressure in fabrication. The US imported 6% of steel from Turkey compared to 16% from Canada, 15% from the EU and 9% from Mexico in 2017, which are all subject to a 25% tariff, per the US Census Bureau.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Nov 26, 2018|
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