Quantfury Gazette

📈Finance

A dynamic war; who can steel the win?

by
Enmanuel Cardozo
Quantfury Product Communication Team
Steel dynamics war for steel 2048x1536 - English

Steel Dynamics (NASDAQ: STLD), one of the United States’ largest steel producers and recyclers, is at the center of a gritty war against the Chinese steel industry. China finds itself in the ironic duality of being both the world’s largest exporter and a leading consumer of steel itself, which is on the verge of imploding. Could this deal be a major blow to the Chinese economy, and if so, who’s to benefit from it?… While Chinese steel mills bleed their profits, Steel Dynamics has positioned itself as a strategic opponent amidst the international steel trade disputes 

Now, consider for a moment… the global clash for steel dominance. 

The steel industry is in the middle of a full-scale war between the United States and China, fueled by US-EU imposed sanctions, trade tariffs, and a bit of old-school diplomacy. For decades, China has been the world’s largest steel producer, dominating the global steel industry and accounting for over half of its production. However, cracks have started to appear in its armour. This dominance now seems to be imploding on its own foundation: stemming from a slow-burning real estate crisis, the economic lockdown with COVID-19 restrictions until late 2022, and, let’s not forget, the steel import tariffs imposed by the US and EU that have been slowly chipping away at the industrial armour of this steel behemoth. 

The truth of the matter is this geopolitical clash is shaking up the global steel market, leading to significant fluctuations in steel prices. And guess what? The Chinese steel sector is feeling the heat. In fact, the disappointing results in the second quarter show just that, as the industry is strained under insufficient demand. And what initially promised to be a relentless supply of steel is now balancing on the edge of unsustainable production. 

Despite the macroeconomic challenges, with reduced shipping volumes and tumbling steel prices, Steel Dynamics (NASDAQ: STLD), like its name, has shown its strength in this turbulent landscape. Actually, these setbacks merely seem to be bumps on the road for the steel powerhouse, especially when compared to its record earnings in the first half of 2022. Yes, there has been a downturn in the steel market, and yes, even Steel Dynamics has felt the pinch, but this turmoil might just be a blessing in disguise for the US and its local steel companies.

On the other hand, we cannot ignore the elephant in the room – China’s property crisis. 

In fact, China’s construction-driven growth model, which was once the backbone of its enormous steel production, has now become their Achilles heel due to the dwindling demand for steel. The escalating property crisis continues to gnaw away at the demand for steel, threatening to disrupt the very balance of this sector. How big is the chunk? Well, construction accounts for 55% of steel demand in China, signalling a possible plunge for the Chinese steel industry. 

Despite the sharp downturn in steel prices and squeeze in profits, Chinese steel mills are stubbornly pressing on. But there’s actually a reason why they keep the wheels of production moving. Simply put, shutting down these steel plants is not an option, as it presents its own set of challenges. Once put out of operation, they require up to six months to be fully functional again if the trend reverses. This leaves steel mills adrift, making them vulnerable to economic pressures and operating at a loss for months. It’s no surprise that a staggering 30% of Chinese steel companies are on the brink of bankruptcy. Steel mills, the once critical cog of China’s economic expansion, begin to sound alarms for the health of China’s two key sectors: manufacturing and real estate construction. 

And now, ladies and gentlemen, the game is set for an interesting twist! 

China’s weakness signals a clear opportunity for the US, and steel companies alike, to grab the opportunity by the horns. While the US and Europe continue to tighten their steel import boundaries, competing for dominance in the global steel trade… And frankly, with nowhere to run, the Chinese government may be cornered into carrying out more production cuts in their steel mills to prevent further effects to the country’s economy. All eyes are now fixed on Beijing, with the question being – what is China’s next move? Maybe, this is exactly the position the US wants to be in to gain ground on the battlefield over the steel trade.  

One might wonder if Steel Dynamics (NASDAQ: STLD) can become a significant piece in the US steel arsenal in this dynamic power struggle between nations. With the pieces in motion, all the players are in suspense, waiting to see how the growing economic pressures and trade policies will unfold in the coming years. One thing is for certain: the war for steel is not over.

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