U.S. Steel Corp. (NYSE:X) may be looking to fund projects in an effort to save jobs in Birmingham, but steel production in China continues at a pace that could make it difficult for Alabama manufacturers to compete.
[Reposted from the Birmingham Business Journal | Ryan Phillips | March 20, 2015]
Manufacturers face overproduction
U.S. Steel wrote in its most recent disclosure to investors that the market is flooded with cheap Chinese steel, causing American imports to rise 68 percent in the last year alone. U.S. Steel has also warned employees to the possibility of layoffs, which could affect as many as 1,800 jobs in the Birmingham area.
U.S. Steel Corp. is Birmingham's third largest manufacturer in terms of full-time local employees, with 1,900 as of January.
David Clark, president of United Steelworkers Local 1013, said in an interview with the Birmingham Business Journal that the different steel manufacturers in Alabama are already feeling the pinch from foreign market saturation.
"All the major manufacturers have used and taken the same stance that the high levels of cheaply priced Chinese steel is going to affect their first quarter profits," Clark said. "Nucor (NYSE: NUE) is one of them and U.S. Steel is citing a high level of imports and unfairly traded products."
On March 19, Nucor also addressed uncertainty in the steel market in its most recent guidance letter to investors for first quarter earnings. The steel producer, known for its "mini mill" design, has 253 manufacturing jobs at its division in Birmingham.
"Overall operating performance at the steel mills segment for the first quarter of 2015 is expected to decrease significantly compared to the fourth quarter of 2014, primarily due to lower selling prices and margins resulting from the exceptionally high level of imports flooding the domestic market," Nucor told investors in a written statement.
Keeping the Iron City from rusting
Despite the uncertainty coming from the East, the Jefferson County Commission on Thursday approved tax abatements totaling $230,000 a year for the next 10 years in an effort to keep the U.S. Steel mills humming in Fairfield.
The goal is for the tax breaks to make it easier for U.S. Steel to invest $277 million in projects, including a new tubular manufacturing facility and electric arc furnace for an existing facility in Fairfield.
Clark explained the concept of market capacity as it relates to steel and how it will affect each individual production facility at the Fairfield Works. The campus has three separate plants: IS&C — iron, steel and casting, a rolling and finishing facility, which specializes in sheet production, and one for oil country tubular goods.
"Capacity is what the market absorbs and with China flooding the market, that's part of the problem," Clark said. "Our rolling and finishing mills are affected by imports of flat roll products from China. Our pipe mill tubular products plant is affected by the same Chinese steel as well as South Korean oil country tubular products being imported into our market."
South Korean production of oil country tubular products also threatens similar manufacturers like the Fairfield Works, Clark said.
"(South Korea) has absolutely no domestic market for their products," he said. "Every manufactured piece of oil country tubular goods is specially produced for export and those export numbers have risen considerably over the last few years."
While local leadership in the Birmingham metro is doing what it can to keep Alabama steel production lines from rusting, government leaders in China are doing the opposite and trying to find ways to convince steel laborers at the local level to ease back on production to alleviate the stress on the global steel market.
Flooding a drowned market
The decision by the People's Republic of China to encourage a slowing in steel production has been met with substantial pushback from local manufacturers who fear for job loss as the government looks to the streamline the industry, according to a report from the Wall Street Journal.
Clark agreed, saying that the Chinese government was not showing signs of cutting back, opting instead to keep their citizen workforce content while the global market becomes saturated with cheap steel.
"The steel industry as a whole — AK Steel, Nucor — has been harmed by subsidized facilities overseas," Clark said. "The Chinese are actually producing in order to keep folks working. They want to keep the workforce happy."
Nucor also recently warned investors, saying a lack of oversight will only serve to bloat the steel market and kill employment in less competitive countries. While the company believes imports of foreign steel will subside in the second quarter, Nucor still predicts high levels of foreign steel to enter the market.
"Global overcapacity built by state-owned enterprises is the biggest risk factor to our business," Nucor told investors on March 19.
While the boom in Chinese production may signal economic and political turbulence in the East, China still shipped a record 100 million metric tons of steel overseas in the 12 months ended in February, according to the New York Times. Domestic steel prices have fallen dramatically in China, as a result of a shrinking housing market, causing China to ship more steel to other countries.
Iron and steel represent $1.1 billion in exports for Alabama, making it the fourth largest export sector in the state. While China may seem to threaten the state's manufacturers, it is also the state's second largest export destination, getting $3.5 billion in Alabama products in 2014, most of which are cars.
As facilities in both countries churn out steel at unprecedented rates, only time will tell if the disproportionate tilt in favor of Chinese steel production will wreak the havoc that many companies are preparing to weather.