Steel: Fasten Your Seatbelts - A Bumpy Ride Ahead

  /  Jan 1, 2019  /  

2018 was a wild ride for the steel industry as prices for the first two-and-a-half quarters of the year were on a straight shot up, driven almost entirely by Section 232 tariffs of 25% on steel imports and tough trade talk. Demand fundamentals in 2018 were solid, as companies had more to spend due to tax cuts, had more incentive to spend on capital investments due to changes allowing for immediate expensing of capital investments, and individuals benefitted from a declining unemployment rate, and slight improvements in wage growth. However, there was no significant uptick in demand that would have resulted in the price movements experienced in 2018. Rig counts increased in 2018 from 2017 levels, but are still well below levels prior to 2015. Domestic vehicle production remained solid, but was roughly in-line with 2017 levels. Construction activity in the US was strong in 2018, but roughly in-line with 2017 levels as measured by the Dodge new construction index for both residential and non-residential construction activity. The only possible explanation for the significant increase in prices in 2018 was that it was not demand driven, but rather almost entirely driven by a reduction in available supply due to the tariffs.