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Steel Prices on the Rise: How Did We Get Here?

When will the current steel supply situation that has led to the extraordinary rise in steel prices be over? Procurement professionals have been trying to figure out that answer for most of this year. Unfortunately, the answer is complicated by several factors, including demand, tariffs, and the changing landscape of the domestic steel industry.

It’s All About Context

Over the last decade, the steel market has turned into a geopolitical battleground for global trade dominance. The current situation began with steel production moving offshore as both environmental restrictions and labor costs rose in the US. The rise of imported steel from India, China, and Southeast Asia led to several high-profile bankruptcies and the reduction of domestic production capacity. The US Government attempted to remedy this situation by implementing trade tariffs and anti-dumping duties on imports from the six largest importers of coated steel.

In years past, the steel industry was largely controlled in the rust belt of the US by several traditional companies that operate Blast Furnaces. The increase of global trade and competitive market forces gave rise to a new type of steel company, operating Electric Arc Furnaces in the southern United States. These new steel companies have a technological advantage and more progressive business models as opposed to traditional steel companies.

Blast Furnace vs. Electric Arc

To put things into perspective, the Electric Arc Furnace operates like a dimmer switch, easily flexing up in times of high demand and throttling back when demand is low. A Blast Furnace operates more like a standard light switch—either on or off. When market demand is low, Blast Furnace companies tend to chase the market price down to cover their higher fixed costs. Conversely, Electric Arc companies curtail production, use less raw materials, and have flexible labor contracts to lower costs as the market adjusts. 

This proverbial tug-of-war between Blast Furnace companies and Electric Arc companies has moved in favor of the Electric Arc with the two largest domestic Blast Furnace operators, US Steel and ArcelorMittal, evolving towards the new production model. Additionally, US Steel has shuttered more than 6 million tons of Blast Furnace capacity over the last year. ArcelorMittal has been even more aggressive, selling its US Blast Furnace assets to Cleveland Cliffs in 2020. In turn, Cleveland Cliffs have shuttered more than 7 million tons of Blast Furnace capacity in the last year as they integrate high-cost assets acquired from both ArcelorMittal and AK Steel.

How is USG Affected?

The steel used to manufacture USG Ceiling Grid is produced from a special type of production line known as a tin mill. A decade ago, there were only four producers of tin products in North America; today, that number is even lower. The only two consistent tin mill producers in the NAFTA market of ultra-light gauge steel are US Steel and ArcelorMittal.

Steel produced off a tin mill has three major applications: canning, backer panels for appliances, and ceiling grid. Steel for both tin cans and backer panels sell for significantly more per linear foot than ceiling grid. As a result of the overall shift towards Electric Arc production, the tin-producing mills have strong pricing power that is inherently supported by robust demand and constrained supply.

In Conclusion…

While prices may begin to correct as a balance is found between supply and demand, continued volatility and uncertainty are to be expected for the remainder of this year. With Electric Arc becoming the steel production of choice in the US, plants that employ this method should continue to benefit from higher market prices and an all-around lack of competition.