From Tom DiChristopher:
- U.S. steel capacity is set to increase by 20 percent around 2022, pushing down prices for steel commodities, Bank of America Merrill Lynch warns.
- The impact will be so punishing, the investment bank is dubbing the next several years of upheaval “Steelmageddon.”
- The path for steel stock investors will be “treacherous” throughout the period.
Bank of America Merrill Lynch is warning of a price-crushing steel glut so punishing that it warrants the end-of-days moniker “Steelmageddon.”
The glut will sweep through the industry over the next few years as new project start-ups create an oversupply of steel commodities. The wave of new additions is expected to hit in 2022, with U.S. steel capacity growing by 20 percent, swamping the market and putting pressure on steelmakers’ profit margins.
In the wake of Steelmaggedon, Merrill sees the U.S. industry emerging with a smaller footprint, as new electric arc furnaces replace older blast furnaces. The bank believes Nucor and Steel Dynamics could emerge with better market share and healthier profit margins, but warns that Steelmaggedon should deter most long-term investors from buying into the space.
“This purge of inefficient capacity can ultimately result in a leaner, more competitive, streamlined U.S. steel industry,” Merrill Lynch analysts Timna Tanners and Wilfredo Ortiz wrote in a research note Thursday.
“After the dust clears from Steelmageddon?, an attractive steel industry could emerge. But we would warn investors the path for the next several years of upheaval can be treacherous.”
(The investment bank is so confident the event will come to pass, it went ahead and trademarked the term “Steelmageddon.”)
In the near term, Merrill Lynch expects steel prices to remain roughly steady, with benchmark hot rolled coil trading between $650 and $750 per ton. But the bank sees prices falling to $550 to $660 per ton into 2021 and 2022.
“In the medium term, none of the U.S. steel mills look secure,” Merrill said. “While we note blast furnace operators likely lose share and shut capacity, all mills suffer from low prices when excess capacity hits the market, in our view.”
The high end of Merrill’s range assumes current market conditions hold up and the U.S. maintains 25 percent tariffs on imported steel.
The industry has been restarting capacity that was shuttered during the last downturn. Through 2021, a second wave of additions will hit as existing steel mills expand. The real impact occurs during a third wave when companies like Nucor and Steel Dynamics open new mini-mills, Merrill says.
The market already got a preview of how these additions will impact the market, Merrill said, noting that restarts helped knock prices for hot-rolled coil from $900 per short ton in July to $660 early this year.
Steel stocks might hold up through 2019 and possibly into 2020, but Merrill says long-term investors can start fading the stocks by the end of this year.
The VanEck Vectors Steel ETF (SLX) was unchanged in after-hours trading Tuesday. Year-to-date, SLX has declined -11.86%, versus a 6.15% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of CNBC.