MT Arcelor Mittal New

By Bob Tita 

U.S. steel companies are slashing production to match a sharp collapse in demand caused by manufacturers idling plants to slow the coronavirus pandemic.

The U.S. steel industry has fallen into its most severe downturn since the 2008 financial crisis. United States Steel Corp., ArcelorMittal and other steelmakers are ratcheting back output and shedding workers, anticipating that orders and prices will fall further.

U.S. mills are operating at 56% of capacity, down from 80% in 2019, according to the American Iron and Steel Institute, and steel output across the country has fallen by a third in three weeks. The spot-market price for hot-rolled coiled sheet steel is $485 a ton, off 18% from a month ago and down nearly half from a recent high in July 2018.

"We're in for a rough ride," said Bill Douglass, a regional president for Lex Group, a steel distributor in Illinois. "There's nobody who's unaffected."

Industry executives and analysts expect production to drop further, even as manufacturers reopen plants. High stockpiles at distributors will likely be drawn down before companies place new orders, said Credit Suisse, which expects sheet-steel demand to plummet 50% in the second quarter from a year ago.

When orders do pick up, executives expect that businesses will spend less and that high unemployment will weigh on demand for autos, construction materials and energy equipment. Those industries account for 82% of domestic sheet-steel consumption, according to market consultant Metal Strategies Inc.

"The big three markets have fallen flat on their face," said David Stickler, chief executive of Big River Steel LLC in Arkansas. U.S. Steel bought a 50% share of Big River last year with a deadline of 2023 to purchase the remaining share for $700 million. U.S. Steel CEO David Burritt has described the acquisition as the company's top strategic priority. A spokeswoman said there has been no change in the acquisition plan.

ArcelorMittal, U.S. Steel and Cleveland-Cliffs Inc., formerly known as AK Steel, are heavily dependent on auto-industry customers. A month of idled car production across the U.S. will cost the steel industry at least $1 billion in revenue, Metal Strategies estimated. Crashing oil prices are discouraging frack-drilling companies from starting new wells. The number of new wells started in the U.S. is down 48% from a year ago and 27% since the end of March.

U.S. Steel idled about two-thirds of its pipe business in March, closing plants in Texas and Ohio. During two weeks in March, customers of South Korea's SeAH Steel Corp. canceled orders for 25,000 tons of pipe, said Kirk Murray, the company's U.S. general manager.

"Our pipe inventory is now massive," he said. Demand had been weakening for a year before the market collapsed, he said. SeAH last week laid off about 30 of the 250 workers at its Houston pipe plant.

"There's more struggles to come," Mr. Murray said. "This is not going away."

U.S. Steel, which was recording losses before the sudden downturn in the steel market, has been one of the more aggressive steelmakers in cutting costs. Last month, the company trimmed its capital-spending budget for this year to $750 million from $875 million to preserve cash. It indefinitely delayed $1.2 billion in upgrades to the rolling line for steel at its mill near Pittsburgh, which includes $200,000 for a coal-coking plant that has been the site of two fires in recent years and has been fined by environmental regulators for emissions violations.

Improvements at a mill in Gary, Ind., also were suspended, and U.S. Steel has idled blast furnaces in Illinois, Indiana and Michigan that account for half the company's capacity to make raw steel. With fewer blast furnaces now melting iron ore, the company also idled one of its iron ore mines in northern Minnesota.

U.S. Steel, ArcelorMittal and other companies that rely on labor-intensive blast furnaces tend to suffer more during market downturns because their mills are costly to maintain even when the coal-fueled furnaces are idled and steel production is lowered, analysts say. The electric furnaces at newer mills operated by competitors including Nucor Corp. and Steel Dynamics Inc. can be quickly throttled up or down, and operate with fewer workers.

Before the downturn, Nucor, Steel Dynamics, Big River Steel and other companies had planned to add about 8 million tons of new steelmaking capacity from electric furnaces by 2021. That would have increased domestic sheet-steel supply by about 10% before the downturn.

Nucor and Big River say they haven't changed their plans. Steel Dynamics didn't respond to requests for comment. Australia's BlueScope Steel Ltd. earlier this month said it has delayed an expansion at its Ohio mill to preserve cash. Adding more steel to a weak market would hold down already depressed prices, analysts say.

"We're small enough and nimble enough to maneuver through difficult times," Big River Steel's Mr. Stickler said.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

April 19, 2020 08:14 ET (12:14 GMT)

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