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U.S. Raw Steel Output Up Y/Y, Capacity Remains Above 80%

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U.S. raw steel production for the week ending Dec 1 climbed on a year-over-year basis on higher capacity utilization, according to the latest report from the American Iron and Steel Institute ("AISI"), an association of North American steel makers.

According to data released by AISI, domestic raw steel production was 1,892,000 net tons for the reported week, an 11.1% jump from production of 1,703,000 net tons for the same period a year ago. However, the reported weekly production reflects a 0.7% decline from the same period a week ago (ending Nov 24).

The year-over-year gain in production came on the back of improved capacity utilization. American steel mills operated above 80% (the minimum rate required for the long-term viability of the industry) of their capacity last week. Capacity utilization – a key metric in the steel industry – rose on a year over year comparison basis. Per the AISI, capability utilization rate for the reported week was 80.7%, an increase from 73% a year ago. Capability utilization for the previous week was 81.3%.

By regions, output from Great Lakes, Southern, North East, Midwest and Western were 713,000 net tons, 676,000 net tons, 225,000 net tons, 195,000 net tons and 83,000 net tons for the reported week, respectively.

Overall year-to-date raw steel production was also ahead of the year-ago levels. Adjusted year-to-date production through Dec 1 was 87,528,000 net tons at a capability utilization rate of 78.1%, up 5.7% from 82,780,000 net tons recorded in the same period a year ago. Capability utilization rate for the period also moved up from 74.2% recorded last year.  

Trump Trade Actions Drive Capacity

Broad-based tariffs which the Trump administration imposed on imported steel under Section 232 of the Trade Expansion Act of 1962 are boosting production capacity of domestic steel makers amid lower imports.

The tariffs are leading to lower imports into the United States. According to the AISI, based on preliminary U.S. Census Bureau data, total and finished domestic steel imports are down 10.6% and 13.4% year over year, respectively, year to date (through the first ten months of 2018) to roughly 29.44 million net tons and 22.08 million net tons, respectively.

Trade actions have helped U.S. steel industry capacity break above 80%. U.S. capacity utilization rate was estimated at 72% in 2017. A flood of subsidized imports led to the tepid utilization last year.

U.S. steel production has gone up this year on the back of improved capacity. According to the World Steel Association ("WSA"), crude steel production shot up 10.5% to 7.6 million tons (Mt) in the United States in October and also increased 5.1% to 71.7 Mt during the first ten months of 2018.

A number of U.S. steel producers are investing heavily to beef up production capabilities and upgrade facilities. Nucor Corp. (NUE - Free Report) has invested around $230 million to add an additional cold mill in Arkansas. It is also investing $240 million in a new galvanizing line at its sheet mill in Arkansas that will have an annual capacity of around 500,000 tons. Nucor’s board has also approved a $650-million investment for expansion of the production capability of its flat-rolled sheet steel mill, Nucor Steel Gallatin, in Kentucky. The move will enhance the production capability of the plant to roughly 3,000,000 tons from 1,600,000 tons annually.

Steel Dynamics, Inc. (STLD - Free Report) is also currently executing a number of projects that should add to capacity. The company, last month, said that it will invest $1.7-$1.8 billion to build a new electric-arc-furnace (“EAF”) flat roll steel mill in the United States that is expected to have a production capacity of roughly 3 million tons annually.

Moreover, United States Steel Corp. (X - Free Report) has restarted two blast furnaces this year at its integrated steelmaking plant, Granite City Works, in Illinois. Both the blast furnaces were idled in 2015 in response to challenging market conditions, including unfairly traded imports. The restart is expected to support the growing demand for steel made in the United States.

The trade tariffs have also boosted U.S. steel prices this year as reflected by the significant run-up in benchmark hot-rolled steel prices, providing margin benefits to U.S. steel producers including U.S. Steel, Nucor, Steel Dynamics and AK Steel Holding Corp. (AKS - Free Report) . Each of these four steel stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While there are still uncertainties surrounding the tariffs including exemptions of countries, the tariffs should provide further cushion to the domestic steel producers moving forward.

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