New York stock analyst Charles Bradford remembers when steel companies' shares were as good as gold.
Times definitely have changed.
“Some of them are down as much as 98 percent,” said Bradford, who heads Bradford Research. “ArcelorMittal peaked at $100, and today it's trading at $4. U.S. Steel peaked at $196 on May 31, 2008, and now it's trading close to $8. That is the lowest price, I think, for that stock in the last 100 years.”
The slump in steel companies' stocks started with the Great Recession but has accelerated this year. Shares of the nation's largest producers have fallen to new lows in recent weeks as the industry is battered by what an analyst described as “a perfect storm of headwinds.”
Cheap steel, especially from China, has exacerbated a global glut in production that has driven down prices nearly 50 percent. Those pressures are happening at a time of shrinking demand and as a stronger dollar makes U.S.-made steel more expensive and less competitive. A prolonged slump in the oil and gas industry has taken away the lifeline domestic steel producers expected from pipe sales.
Steel companies' revenues are shrinking and their losses mounting, contributing to investors' pessimism about share prices.
In the past 12 months, shares of U.S. Steel Corp. have fallen 77 percent; ArcelorMittal stock, 65 percent; and AK Steel is off 68 percent. Allegheny Technologies Inc. has declined 68 percent since hitting a high in May. U.S. Steel and ATI dropped to 52-week lows in the last week of November.
“What's happened is what I would call a perfect storm of headwinds in 2015,” said Andrew Lane, an analyst with Morningstar Inc. in Chicago. Although stocks are down significantly, he noted, “none of us believe that they are significantly undervalued.”
THE CHINA FACTOR
The damage wrought by cheap imports, which the industry argues are unfairly subsidized by China and other countries, is one area where executives and labor agree.
“We're very heavily exposed to the energy side,” U.S. Steel CEO Mario Longhi said during an interview Friday on CNBC. “We're also suffering from a very significant level of dumped material coming into the United States and both things are pressuring jobs significantly.”
Longhi said cheap imports are undermining the more than $1 billion in expenses he has cut since taking over leadership of the company in 2013. The company has idled mills and laid off thousands of workers.
In the CNBC interview, he characterized the problem facing steel as an industrial recession.
Imports from China and South Korea, two of the biggest steel exporters, have declined this year compared with 2014, but they remain significantly higher than they were in 2013, according to the American Iron and Steel Institute, a steel industry group.
Chinese steel imported into the United States is down 18.2 percent through October, but was up 68 percent between 2013 and 2014. Steel imports from all countries are projected to total 40.7 million tons this year — down from 44.3 million last year, but up from 32.2 million in 2013.
China, the world's biggest producer of steel, has ramped up capacity in recent years to feed a rapidly expanding economy that needed steel for manufacturing, road construction and buildings. But the Chinese economy has cooled and created pressure for that country's producers to dump their excess steel in the United States and other markets, said Lane, the Morningstar analyst.
“The steel industry, on a global basis, faces a situation of over-capacity,” he said. “That is particularly true in China, where over-capacity amounts to four times the actual production of steel in the U.S. this year.”
OTHER PAINS
America's steel producers have asked regulators to penalize China and other countries they allege are dumping steel into the domestic market. In one victory, the Department of Commerce last month proposed a 236 percent duty on imports of corrosion-resistant steel from five Chinese companies.
The onslaught of steel from China has compounded a global surplus that probably will last for years, Standard & Poor's Ratings Services estimates.
The Chinese churned out 823 million tons of steel in 2014 for internal consumption and export, according to the World Steel Association. The production total dwarfs the output of the next two largest competitors combined — the United States, with 88 million tons last year, and Japan with 111 million tons.
The oversupply of steel, including cheap exports from China and elsewhere, has driven down prices by 30 to 40 percent. The U.S. benchmark — hot-rolled coil — was selling for $364 a ton last week, down 42 percent from $633 a ton a year ago.
But a surge of imports isn't the sole cause of pain for the steel industry. Bradford cited the strength of the dollar, which has reduced the competitiveness of American exports in the global market.
“For the steel companies and the major metals, there is one major issue, and that is the value of the dollar,” Bradford said. “These companies all do very poorly when the dollar is doing well.”
Overall, the factors combine for a subdued outlook for steel companies.
“We expect only modest revenue growth and modest margin expansion for the steelmakers to recover through the decade,” Lane said. “And that is largely, in our view, because we have entered a period of lower-for-longer steel prices.”
FIGHTING THE TIDE
ATI, which produces specialty products such as nickel-based stainless steel and high-end alloys, has been trying to generate more business by serving the aerospace industry, which is more profitable, spokesman Dan Greenfield said.
Through the first nine months this year, ATI's sales to the aerospace and defense markets were $1.16 billion, representing 39 percent of the company's total revenue. Yet broader weakness in demand for stainless sheet has been a drag on the company's share price, Greenfield said.
“Demand for stainless has been weak, generally,” said Stephen Levenson, an analyst for Stifel Nicolaus in New York. “Energy, infrastructure, chemical process (sectors) are all lower.”
Officials with AK Steel and U.S. Steel declined to comment. Attempts to reach ArcelorMittal were unsuccessful.
The companies have responded to the downturn by cutting costs and trying to improve efficiency.
U.S. Steel has closed a blast furnace in Alabama and idled operations in Texas, Illinois, Indiana and Minnesota. But it's investing in an electric arc furnace at its Fairfield Works in Alabama, which would allow the company to avoid the high cost of shipping iron ore south and instead use locally sourced scrap to produce steel.
ATI, which built a high-tech rolling mill in Harrison that is more efficient, is trying to lower long-term health care and other benefit costs through its labor pact with the United Steelworkers. The company locked out 2,200 of its union employees Aug. 15 when contract talks failed.
Union employees at the other companies remain on the job under contract extensions.
Source: http://triblive.com/