The Motley Fool: Did China Just Take Another Bite Out of The U.S. Steel Industry?

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The Chinese economic slowdown story is so much bigger than it looks, and the U.S. steel industry is one sector that's tired of taking it on the chin. But it isn't a direct impact, and that's what's so frustrating for U.S. steel mills such as Nucor Corporation (NYSE: NUE), and Steel Dynamics (NASDAQ: STLD).

[Reposted from The Motley Fool  |  Reuben Brewer  |  October 13, 2015]

Supply and demand
China's economy is slowing down from a breakneck pace just a few years ago. While going from over 10% gross domestic product growth to something in the 7% range is hard to complain about in the developed world, it's a sea change for China -- and for the companies that ramped up to supply the fast-growing nation with the materials it needed to support its growth. One of the most notable impacts has been in base commodities, such as iron ore and coal. But the damage is widespread.

There is, however, a second issue here. Not only did miners ramp up to supply the nation with raw materials, but other industries boosted output, too. Steel, which is a key building block behind economic growth, was one such area. With more steel being made in China than is being used in China, the country has lately been sending its steel wares to other parts of the world. And, thus, a global glut of steel.

How bad is it? In U.S. Steel's second-quarter earnings release, the company states, "Our Carnegie Way efforts, combined with short-term cost improvements, have helped to partially offset the continued depressed volumes and low prices in both the tubular and flat-rolled markets as well as the negative impact of tremendously high levels of imports." Tubular prices, by the way, are being affected not just by the fall off in oil prices but by "near record levels of tubular imports, much of which we believe are unfairly traded."

It ain't over yet
And while that was the second quarter, the impact of China's slow down is still going on. For example, Nucor, Steel Dynamics, and AK Steel have all come out and adjusted their third quarter guidance. And every single one of them cites imports as a problem spot.

According to Nucor: "Steel prices and margins remain under pressure from exceptionally high levels of imports that continue to flood the domestic market. Imports accounted for an estimated 30% of the finished steel market in the first eight months of 2015, compared with an estimated 27% in the first eight months of 2014."

Steel Dynamics: "[F]lat roll steel shipments, specifically commodity-grade hot roll products, are expected to decline in the third quarter 2015, due to the continued excessive level of steel imports."

Fighting words
The big U.S. steel mills aren't happy about what's going on, and neither are investors. Nucor and Steel Dynamics both provided earnings guidance for year-over-year earnings declines.

These companies have been pushing the U.S. to fight back on imports, but it's a slow process, and importers often find a way around the roadblocks that do get imposed. For example, a Chinese company could export to a country that hasn't been hit with trade restrictions, thus forcing that nation to export steel products to the U.S. market to offset the flood of Chinese steel into its home market. In the end, there's no gain for the U.S. steelmakers, even though the companies and U.S. government are working hard to stop the pain via available legal channels.

The upshot here is that third-quarter earnings for the big U.S. mills are likely to be weak. Imports will be a big part of that. And it isn't an issue that's going away any time soon. That's just one more problem to thank China for while you're reading the releases for American steel producers.

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