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While the surge in markets for US steelmakers last year has begun to weaken a little, the substantial momentum it created looks set to carry demand and capacity growth forward through 2022, reports Myra Pinkham.

The US steel market is expected to continue to strengthen in 2022, although the rate of improvement will clearly not be nearly as pronounced as the record-breaking upward momentum that occurred last year, as the market emerged from the depths of the Covid-19 pandemic and the resultant lockdowns by various steel consumers. Alistair Ramsay, head of research for Fastmarkets MB, estimated that US apparent steel consumption increased by 21.3% in 2021, peaking in October when it surged to its highest level since March 2018, which resulted in US steel demand coming within about half a million tons of its 2019, pre-Covid, level. Kevin Dempsey, president and CEO of the American Iron and Steel Institute (AISI), noted that is quite a contrast from what occurred in 2020, when US steel demand declined by 18% year on year. Even with the US steel market starting to moderate slightly towards the end of last year due to factors including an easing of domestic mill capacity utilization, an uptick in imports, supply chain issues and concerns about rising interest rates, Philip Bell, president of the Steel Manufacturers Association (SMA), said there is at least cautious optimism about the strength of both the US economy and the domestic steel market in 2022. While there is no question that underlying US demand for most for most steel-consuming markets were much improved in 2021, Philip Gibbs, an equity research analyst with KeyBanc Capital Markets, said that it felt even better than it actually was, given that – partly due to all the apprehension about what the impact would be from the Delta and Omicron Covid-19 variants – companies came into the year with historically low steel inventories. Therefore, helped by all the pent-up demand and stimulus money, there was a big push to restock. Ramsay said that stock build will be consumed over the next two years, leading to a slowdown in order activity at steel suppliers. Meanwhile, he forecasts that steel demand will rise by about 4.0% this year and that underlying and apparent steel demand could reconverge back to the 2018 levels. Construction trends Even though much of the initial mid- to late-2020 steel recovery, which heralded in the recent boom in spot prices, was largely due to sectors that mainly consume flat-rolled products, such as appliances and other consumer durables, Ramsay said that a bigger portion of the growth in 2021 was actually in such long-product consuming sectors as construction, which is the largest US steel-consuming sector. Infrastructure construction spending, which has already been resilient over the past few years, should continue to grow. Lisa Goldenberg, president of Delaware Steel Co., noted that is being driven by the fact that many US roads and bridges are in “deplorable” shape, which is a view that has been supported by the American Road & Transportation Builders Association (ARTBA). Based on the latest US Department of Transportation data, ARTBA estimates that nearly 224,000 US bridges (36% of all US bridges) either need to be replaced or to have major repair work. While the recently passed $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) will eventually provide resources for these and other infrastructure improvements in the US, its impact on steel demand, particularly on rebar and plate, is not likely to be felt until next year. Ramsay estimated that about 40-50 million short tons of steel will be used in infrastructure projects. Gibbs said that private non-residential construction activity could be adversely affected once the Federal Reserve starts raising interest rates especially given the recent multiyear buildout in commercial, particularly warehouse and data center, construction, and the shortage of construction workers. The American Institute of Architects’ Architecture Billings Index moved further up in December to 52.0 points, indicating that non-residential construction could see further upward momentum. Headwinds for automotive At the same time, the automotive market, which accounts for about 30% of US steel demand, has been facing headwinds, said John Anton, a director of IHS Markit’s pricing and purchasing service. “The automotive sector would be doing great, because there is demand out there, but the automakers don’t have the necessary parts, including microchips, to complete them,” he explained, noting that for much of 2021 the OEMs continued to use steel and store incomplete vehicles, but they are now running out of space. Ramsay said that the continuing trend toward lightweighting vehicles could potentially negatively impact gross demand for steel. That is being countered to an extent by the mills’ production of advanced high strength steels, including new third-generation steels, SMA’s Bell pointed out. For example, at its recent fourth-quarter earnings conference call, Leon Topalian, Nucor’s president and CEO, noted that on December 16 the steelmaker’s Blytheville, Arkansas, facility produced its first prime coil of third-generation AHSS at its new galvanizing line there, joining other US mills, including its Hickman, Arkansas, cold mill in producing such high-strength, lightweight steels. “Even when microchips start becoming more available, the automakers won’t immediately increase their steel consumption,” Anton said, since they will be installing those chips into the already partially built vehicles. On the other hand, SMA’s Bell said that such supply-chain issues could also potentially expand the demand cycle. Mark Millett, chairman, CEO and president of Steel Dynamics Inc. (SDI) observed that after falling to about 13 million light vehicles last year, North American auto output is projected to increase to about 15 million units in 2022, and to 17 million units in 2023. While there is still some lack of reliability in logistics, overall supply chain issues have recently started to improve considerably, Steven Eldam, senior vice president of recycling and sustainability for Evraz North America, said, including those related to the critical parts and products that steel mills need to step up their production to meet demand, such as refractories, alloys and electrodes. When they had been in short supply for a period of time they had affected steelmakers’ ability to service their customers effectively. Rising steel demand “Overall, the outlook for 2022 is for a further increase in steel use,” AISI’s Dempsey said, noting that later this year the infrastructure bill will begin to impact non-residential construction activity and associated steel demand and that at the same time the manufacturing and energy sectors are expected to continue to recover. At the same time, he said that several challenges remain, including the uncertain path of the pandemic and its impact on broad economic conditions. “Also, inflation has surged with the US consumer price index up 7.1% year over year, and interest rates are very likely to rise in the coming year. In fact, it is widely anticipated that the first of several US interest rate hikes will be announced in mid-March.” Although the demand outlook for 2022 is somewhat mixed, SMA’s Bell said that he is cautiously optimistic about the future for several reasons, including increased industry consolidation and its resultant pricing discipline, the passage of the infrastructure bill, and the US government's commitment to carefully unravel Section 232, as is evidenced by its recent agreement with the European Union for an alternative scheme for imports. He said that another plus has been the continued modernization, decarbonization and electrification of the US steel industry. Capacity and capability climbs There is expected to be a big surge in US electric-arc furnace (EAF) steelmaking capacity – as much as 10-20 million short tons of capacity coming online by 2024, including several new projects that have just been announced over the last several months. While the lion’s share of these greenfield mills and brownfield expansions are for production of additional steel sheet, this increase also includes plate, rebar and merchant bar capacity. “But you can’t just look at this new capacity as being an addition,” Bell observed, given that more modern, efficient, greener new capacity is going to replace both less-efficient, high-carbon- emitting capacity as well as potentially displacing some imported steel – particularly if US trade laws are applied appropriately. This, he said, is resulting in both integrated and EAF-based steel producers to re-evaluate their portfolios, including what mills they plan to continue to operate and what they will use those mills for. Gibbs noted that some steel sheet capacity has already begun to come online with more slated to do so throughout this year. For example, at the end of January SDI started up the hot end of its 3- million tpy Sinton, Texas, greenfield flat-product rolling mill. Millett has described the mill as being “transformational”, partly because of its location in an underserved regional commercial market near the US-Mexico border, but also because it could be the first US EAF mill to sell steel into the exposed automotive sheet market. Meanwhile, Topalian said that the hot band modernization and expansion project at Nucor’s Gallatin, Kentucky, mill, which give Gallatin thicker slab casting and wider coil capabilities, is expected to start up sometime in the first quarter of this year and that the company’s greenfield Brandenburg, Kentucky, mill is on track to roll its first steel plate products in the fourth quarter of 2022. Several new projects have also been announced over the past few months. For example, Nucor announced that it will be building a 3 million tpy greenfield sheet mill in Mason County, West Virginia. Also, US Steel announced in mid-January that it would be adding two more EAFs at its Big River Steel facility, creating a 6.3 million ton “mega-mill” on the Osceola, Arkansas, site. Meanwhile both Nucor and Commercial Metals Co. (CMC) have recently announced plans to build new rebar micro-mills. In addition to a second mill in Mesa, Arizona, CMC is planning to build another micro-mill at a site in the Eastern US. Similarly, in December Nucor announced its intention to build a rebar micro-mill in the South Atlantic region. One question related to all this expansion is whether the mills will have access to enough scrap, particularly prime scrap (see box). Anton said that is why some steel companies are buying more scrap assets, such as Cleveland Cliffs’ acquisition of Ferrous Processing & Trading. Overall, 2022 should be another good year for the US steel market, at least from a historical standpoint, Gibbs said. “However, it will be almost impossible to replicate what we saw in 2021 given that there had been such a massive short squeeze of everything, given all the supply chain issues and how much steelmaking capacity was offline.” He said that this year it will be a more normalized supply-demand environment, which, in turn, will result in lower prices, even though steel volumes will remain decent, especially during the first half of the year. Anton agreed, noting that while US steel prices will not be as high in 2022 as they were in 2021, they will still be higher than their ten-year average. Ramsay said that US steel prices should remain high both in nominal and real terms for the next couple of years with the effective resistance by steel suppliers being at a $700 per ton base price for hot rolled coil, compared with $400 per ton during the pandemic lockdowns. As goes steel, so goes scrap While the US ferrous scrap market has been under some pressure at the onset of the year, it appears that 2022 will be another favorable year for it, albeit maybe not as strong as last year had been. It will likely be followed by even more positive demand further forward as more domestic (EAF) steelmaking capacity comes online. “Both volumes and prices for US ferrous scrap were up significantly in 2021,” which is not surprising with domestic steel production rising by about 20%, Joseph Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI), said. This came as the US economy, including such major steel-consuming sectors as construction and transportation, began to recover from the downturn in 2020 caused by the Covid-19 pandemic. “Even with some shutdowns in the auto industry and the shortage of microchips, which also affected appliances and other durable goods, on average US steel mills have been running at 80%-plus capacity utilization ever since last summer, which had been positive for scrap demand,” Frank Goulding, Southeast ferrous marketing manager for SA Recycling, noted. But things could be starting to change, Alexander Kershaw, a senior analyst with Fastmarkets research, said. As of the week ending January 22, US steel mill operating rates were down a little at 81.9% from an average of 84% in the second half of last year. He said this suggests that scrap demand is easing down slightly and helps to explain the drop in scrap prices in January, with Chicago prime scrap falling about $60 per gross ton and shredded and other obsolete scrap falling $50-55 per ton. That was the first decline since September 2021 for the obsolete grades and since October 2021 for prime. That price movement was somewhat unusual because traditionally US ferrous scrap prices tend to pick up in January. “It was a correction that was the result of a perfect storm,” Greg Dixon, CEO of Smart Recycling Management, said. Owing to some mill outages, certain scrap dealers that did not sell heavily for December deliveries had a lot of scrap on hand. Warmer than usual weather in November and December was also likely another contributing factor, Lisa Goldenberg, president of Delaware Steel, said. “I think that that weakness in January pricing was more due to steel mill orders than scrap availability,” Pickard said. Don Martin, senior vice president of scrap sales and marketing for Alter Trading Corp., agreed, noting that, with all the logistics issues, deliveries have been coming to mills bunched, resulting in them overbuying one month and then cutting back the next. Labor shortages at mills have also been a contributing factor, Steven Eldam, senior vice president of recycling and sustainability at Evraz North America, pointed out, given that they have affected steel production and therefore scrap demand. International factors With these trends continuing, early indications are that scrap prices will decline further – potentially by another $35 per ton – in February. This comes as US ferrous scrap exports to Turkey were down 17% year to date through November 2021, even though the country’s steel output was up 13%. This, Pickard said, is because with the depreciation of the lira versus the US dollar and high transportation costs, Turkish steelmakers bought scrap from other origins, including Europe and Russia. But with US exports higher to certain other countries, including Mexico, Vietnam, Peru and Brazil, he said that total US ferrous scrap exports were up just under 7% through November and, assuming that global steel production continues to grow, US ferrous scrap exports should see even a greater rate of increase this year. Strategic acquisitions One big question is whether, with all the new US EAF steel capacity coming online over the next several years, there will be enough US ferrous scrap, particularly prime scrap, which is currently in very tight supply, to meet that demand. Evraz’s Eldam noted that with prime scrap being so tight its premium over obsolete scrap is at a historical high – about $130 per ton. This is not the first time this question has been raised, Mark Millett, chairman, CEO and president of Steel Dynamics Inc., noted. “But given that ferrous scrap, particularly obsolete scrap, is perhaps the most liquid commodity, we have never run out of it in the past.” But there might be a problem this time, according to John Anton, a director of the IHS Markit, pricing and purchasing service, given that very little new direct reduced iron and other scrap alternative capacity has been recently added in the US at the same time as prime scrap generation is also lower than anticipated, with auto production at only about half of pre-pandemic levels. This is likely to result in US steelmakers making further strategic acquisitions of scrap assets, noted Philip Bell, president of the Steel Manufacturers Association, adding that not only do many EAF steelmakers already own scrap assets, but also in a recent move Cleveland-Cliffs, an integrated steelmaker, recently acquired Ferrous Processing & Trading. In another big recent deal, BlueScope has acquired the ferrous scrap assets of MetalX, including its shredder in Delta, Ohio. Analysts believe other big deals in which steelmakers will acquire scrap businesses are in the pipeline. The consolidation in the ferrous scrap market is not limited to steel mills buying scrapyards. Recyclers are also buying other recyclers. Goulding said that SA Recycling has been particularly active in doing so, most recently acquiring PSC Metals in December, and it is continuing to look for further opportunities. The year “2022 should generally be a positive year for ferrous recyclers,” Pickard said, especially given the increased emphasis upon sustainability and the green economy combined with the impact of the increased EAF steelmaking capacity. At the same time, Kershaw expects prime scrap generation to improve. He said that while that should help to narrow the spread between prime and obsolete scrap, it could also ease demand for shredded scrap, which is currently being used by some mills in lieu of prime.

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