Is China the Big, Bad Wolf of the Steel Industry, Part 2

Is China the big, bad wolf of the global steel industry, wreaking havoc on markets and companies around the world?  This is the 4th in our series on steel tariffs and part 2 of our focus on China.  Our major conclusions thus far: There’s been a huge increase in productivity in steel making, there hasn’t been an unusually large sure in imports, and China consumes most of its own steel and doesn’t sell much to the US.  Some say China’s huge increase in production capacity drives down prices in a way that hurts everybody.  In this video we focus on this issue. 

 

Steel prices are more impacted by the commodity cycle than overcapacity

 

We start with this graph which is the price of steel in the US since 2002.  This is the price of steel and oil over that same period.  This is the price copper.  This is tin.  As you can see, they all move in tandem, part of what’s called the “Commodity Cycle” which is tied to general economic growth and sentiment.  This line represents China’s capacity build up.  This is China capacity utilization, which has fallen from 80% to 70%.  The point is this.  Steel prices are more correlated to oil prices than Chinese capacity.  Furthermore, the largest hit to steel prices in the last 15 years was America’s financial crisis, not China’s steel utilization rate.    

 

US Companies with advanced technology perform much better

 

Now let’s look at the steel market from another perspective.  Nucor and US Steel are America’s largest steel companies.  Nucor is a pioneer in what are called mini-mills which use recycled steel and are more flexible, among other advantages.  US Steel is the leader in the older process of making steel out of iron ore.  We have graphs on revenue, net income, and employment, since right before the financial crisis of 2008.  Although both started at the roughly the same point, across the board, Nucor has outperformed US Steel.  Not even close.  The point?  Whatever is happening in the market, the company with the newer technology outperforms the old technology across the board.  That must mean something. 

 

Overcapacity has in impact, but not an overwhelming impact, on steel prices

 

We’re not saying over capacity doesn’t impact the market.  It does.  But capacity isn’t the only factor and it sure seems like economic conditions in general and technology have an even greater impact.  When you consider that China’s capacity has already leveled off, combined with the conclusions we reached in our other videos, you have to wonder exactly what problem the tariffs are supposed to be solving and whether they solve any problem at all.