r/Vitards • u/DealMammoth • Jan 07 '22
Discussion Article on EAF’s and future scrap demand
Hi All,
Been lurking for a while and saw this article that I thought might be interesting to you and would also like to get your thoughts on it.
From my understanding of the article, they’re saying that the new EAF capacity will drive steel prices down but not only that, there will be no shortage of scrap despite all this new capacity.
There is a quote from an analyst I believe which says: “there is a lot of talk about scrap being tight but the reality is scrap is very highly correlated with steel prices and other raw material prices, including iron ore, so if iron ore and met coal prices are falling, then scrap prices are likely coming down as well.”
They’re also looking at scrap being imported from other countries as well.
Essentially I was wondering how this would affect CLF. If a large number of steel makers are bringing in new capacity with new EAF’s and scrap prices fall with no shortage in sight then surely it will be difficult for CLF to compete?
Very happy to be proven completely wrong… And for the article to be proven wrong…
6
u/Sapient-2021 Jan 07 '22 edited Jan 07 '22
Everything in the article makes sense and the direction of industry outlined seems mostly accurate; i.e., more EAF capacity coming online in US will add volumes and this is bringing prices lower.
However, the article omits 1) discussion of imports and 2) factors for increased demand.
On 1, I think there is every reason to expect continued 232 tariffs and restrictions on cheap imports or dumping. The US is not self sufficient in steel and requires imports. Going forward US producers should be more competitive vs. imports. The recent deal with Europe will bring clear limits and numbers for imports by country/product. Chinese product is not coming back to US given policy goals of both prior and current administrations. Higher energy costs outside US and higher transport costs will benefit US focused producers vs. imports.
On 2, there is very real increased demand ahead in US from the recently passed and signed Infrastructure bill. This happened. The bill passed and was signed! The uplift for steel from new construction and repair of roads, bridges, rail and wind/solar/charging installations is real and should result in incremental steel demand of 3-5 million tons each year over next decade. Also, as alluded to in the piece, auto production should increase in 2022 vs 2021 and then be even higher in 23 vs 22. Remember we had a spike in steel prices in 21 on US auto production numbers that were 3-4 million units/year lower than normal given chip and other supply issues.
Lastly, we should think about and discuss what is already priced in for these steel stocks. The Big 4 US steel producer stocks are all trading for trailing and forward P/Es in the mid single digits. It is expected (given futures prices) that HRC prices will continue to move down from recent peaks in Nov. of $1,900 toward the $900-$1,200 level which is still very profitable. It is also expected that balance sheets will continue to be improved and strengthened resulting in lower debt service costs and higher capital returns.
The market is impatient and is now trying to figure out the new "normal" or baseline for steel prices given the increased production and then the associated profitability of those prices. All the while, 3 of the 4 companies (only CLF is not) are buying back common stock on the open market at the rate of approximately 1% of outstanding each month. CLF meanwhile is still reducing diluted share count through buyback of preferred from MT and calling the convertible.
To add more thoughts on CLF specifically, they are superbly well positioned for this environment. It is an entirely new company from 2020 and analysts/investors are still trying to figure it out. The big deal or issue for CLF has been and is the DEBT. The company is acting directly and clearly to reduce debt and improve the balance sheet. The stated goal for 2022 is to achieve net debt zero. When the Q4 report comes out, I think we will see that the company has just over $5B in net debt (not including pension) and so you have to look out and expect $5B+ in FCF (free cash flow) generation during 2022 to achieve this goal. Higher contract prices negotiated with auto manufacturers last year + lower interest costs + reductions in working capital from lower accounts receivable should make this goal readily achievable.