EAFs poised to expand share amid steel mill closures

Integrated steelmakers like AK Steel, ArcelorMittal and US Steel have idled more than 7.4mn short tons (st)/yr of flat-rolled steel production after US automakers shut plants. Six of the 14 active blast furnaces in the US are idled. A seventh, the 2.73mn st/yr blast furnace C at ArcelorMittal's Burns Harbor integrated mill, is down for planned maintenance.

The idlings have reduced integrated steelmaker's production by at least a third in the span of a month.

Meanwhile, shutdowns have so far been limited at scrap based minimills, which use electric arc furnaces (EAFs) to convert scrap into raw steel. Steel Dynamics (SDI), which operates two flat-rolled minimills, expects to trim operating rates to 80pc of capacity for April and May, at least.

Overall US steel capacity utilization as of 18 April fell to 57pc, the lowest since 2009. Utilization was above 80pc as recently as 14 March.

EAFs, which can quickly ramp production up or down, have been taking market share for years, accounting for 70pc of US steel production capacity last year, up from 62pc in 2009, according to data from the American Iron and Steel Institute (AISI). Shutdowns by integrated steel makers create conditions for further expansion.

The Covid-19 crisis and sudden economic downturn has laid bare and worsened the financial challenges integrated steelmakers were already facing, Bank of America Merrill Lynch analyst Timna Tanners said. Capacity expansions in progress by EAF steelmakers is a reason why "some of those blast furnaces should never come back online," she said in a note to clients.

US Steel is a unique case, being the last integrated company in the US to rely on steelmaking as its primary business. The company last year paid $700mn for nearly half of Arkansas-based EAF steelmaker Big River Steel, with the intention to buy the remainder, in a bid to diversify and lower production costs. US Steel is also in the process of completing its first EAF, a 1.6mn st/yr melt shop at its Fairfield Tubular facility near Birmingham, Alabama. The EAF is set to serve the pipemaking business that has been hurt by a historic downturn in the North American energy industry.

US Steel needs to cut capital expenditures, but probably will finish the new EAF "even though that market is dead," Tanners said.

Shutdowns by the integrated mills are currently seen as somewhat temporary and unlikely to slow price declines, with potential restarts threatening to overwhelm the market with supply, according to Tanners and other industry analysts.

The shutdowns won't do much to create a floor on steel prices in the near term and as furnaces restart "they effectively set a ceiling for price recovery," Cowen analyst Tyler Kenyon said.

The Argus US hot rolled coil (HRC) index has fallen by 21pc since 10 March, even as steelmakers announced production shutdowns.

Kenyon believes US Steel is likely to take further action to reduce sheet production at its Granite City mill near St Louis, which has already idled one of its two blast furnaces. The remaining blast furnace "B" can produce 1.2mn-1.5mn st/yr of flat rolled steel. Granite City was restarted in 2018 in the wake of the Section 232 tariff on steel imports that helped resurrect idled US capacity.

By Rye Druzin