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Analysts warn of 'steelmaggeddon' following 20% jump in U.S. steelmaking capacity

A rendering of the new steel mill Steel Dynamics plans to build in Texas, one of a few new mills that will come online over the next few years.

Northwest Indiana's steel industry has had to be tough and resilient to survive for more than a century while so many steel mills across the country ended up as empty husks, museums or parks.

U.S. Steel's South Works, across the state line on the South Side of Chicago, was once the largest steel mill in the country. Today, all that's left are modern ruins of 30-foot-tall iron ore break walls where the mouth of the Calumet River opens into Lake Michigan.

The Region's steel mills along the South Shore of Lake Michigan have survived the Great Depression, several recessions, floods of dumped imports, prolonged strikes, the collapse of most of the rest of the great American integrated mills in the 1970s, the disappearance of century-old steel companies like Inland Steel and Bethlehem Steel and the import crisis of a few years ago that resulted in more than 13,000 steelworker layoffs nationwide.

But a new threat looms that analysts warn could be existential.

Mini-mill operators are investing billions of dollars in brand new steel mills that will boost U.S. steelmaking capacity by about 20% over the next few years. A sudden glut in steelmaking capacity at a time when U.S. mills are already running at only about 80% of capacity, and when demand is not expected to increase much, could severely depress steel prices and lead to the closure of older, less efficient steelmaking capacity, like that at Northwest Indiana's integrated mills, which were mostly built during the early days of the 20th century.

U.S. Steel already has idled two blast furnaces, including No. 8 at Gary Works, that weren't profitable to run at the lowest steel prices since 2016.

Nucor, which long ago supplanted U.S. Steel as the largest U.S. steelmaker, is investing $650 million to add 1.4 million tons of capacity at a Kentucky sheet mill, and $1.35 billion in a new 1.2 million tons per year steel plate mill in the Bluegrass state. Fort Wayne-based Steel Dynamics plans to invest up to $1.8 billion on a new three million tons per year flat-rolled steel mill in Texas.

The new Big River Steel is pumping $1.2 billion into an expansion that will double the capacity of its new Arkansas mill to 3.3 million tons per year. BlueScope Steel and JSW Steel also are pouring hundreds of millions of dollars into expansions that will bring more capacity online.

S&P Global Platts estimates U.S. steelmaking capacity could increase by at least 17.5 million tons.

Bank of America Merrill Lynch analyst Timna Tanners has dubbed it "Steelmageddon."

“In the medium term, none of the U.S. steel mills look secure,” Tanners and analyst Wilfredo Ortiz wrote in a note. “While we note blast furnace operators likely lose market share and shut capacity, all mills suffer from low prices when excess capacity hits the market, in our view.”

The analysts predict the newer electric arc furnaces, which make steel from scrap and are cheaper to operate, will replace some of the older blast furnaces that make new steel from scratch.

“This purge of inefficient capacity can ultimately result in a leaner, more competitive, streamlined U.S. steel industry,” Tanners and Ortiz wrote in their report. “After the dust clears from Steelmageddon, an attractive steel industry could emerge. But we would warn investors the path for the next several years of upheaval can be treacherous.”

Mini-mills, which tend to be smaller, non-union operations in more rural areas, accounted for just 15% of U.S. steelmaking in the 1970s but are responsible for more than 70% of the production today, said Charles Bradford, an analyst at New York City-based Bradford Research, Inc. Mini-mills typically are less capital intensive, have lower operating costs and use electric arc furnaces that can be turned off when demand is low, while blast furnaces must burn around the clock unless taken offline for relining or other maintenance work. Mini-mills typically employ far fewer workers than the hulking integrated mills like those that line the Lake Michigan lakeshore, and they tend to be paid less.

Integrated mills have long dominated the automotive sector, among others, because they produce cleaner, higher quality steels, especially coated products with superior surface quality, but new technological advancements have helped mini-mills close some of the gap.

If newer mini-mills do end up supplanting older blast furnaces, it may not bode well for Northwest Indiana, which has half the nation's blast furnace capacity.

"The mini-mills are adding all this new capacity and increasing capacity of existing plants," Bradford said. "There's going to be 20 million tons of additional capacity with limited or minimal demand growth. There's been no real demand growth for quite a while. They're probably going to have to cut out 10 million tons of capacity. That could end up being U.S. Steel."

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Business Reporter

Joseph S. Pete is a Lisagor Award-winning business reporter who covers steel, industry, unions, the ports, retail, banking and more. The Indiana University grad has been with The Times since 2013 and blogs about craft beer, culture and the military.