Steel prices in the U.S. are skyrocketing, at least partly because of dwindling domestic production and tariffs on steel imports enacted under former President Donald Trump. The trend could stifle any sweeping infrastructure stimulus effort.

Steel companies made significant production cuts in early 2020 as the lockdown caused by the global pandemic slashed demand from typical end users, such as automakers and suppliers of construction materials. Those sectors quickly regained their footing, and companies are now using more of their steel production capacity than before the pandemic, according to industry figures.

However, analysts said domestic supply has not kept pace with demand and tariffs have constrained cheap steel imports from entering the market. As a result, the price of steel in the U.S. has trended upward since September 2020. On July 14, the NYMEX domestic hot-rolled coil price reached $1,827 per tonne, an all-time high, according to analysts. The share prices of major steelmakers such as Cleveland-Cliffs Inc. and U.S. Steel Corp. are trading at over 200% above their year-ago prices, according to S&P Global Market Intelligence data.

Tariffs potentially to blame

Soaring prices are largely the product of lost U.S. steel capacity and the 25% tariffs on steel imports established in 2018, according to Ronald Cecil, principal Market Intelligence iron ore and steel analyst. "The tariffs have had an impact to a degree. [The U.S. is] not a massive importer, but you import steel, and it is obviously having an impact on the cost of bringing that material in," Cecil said. "Add to this that a lot of capacity's been taken out of the market over the last four years [and] it's less competitive to produce."

Steel prices have surged worldwide in response to supply cuts that were welcomed by an industry struggling to figure out what to do with a glut of material in the market, HSBC senior equity research analyst Jonathan Brandt said. Steel production cuts by China, a major steel exporter, may have played a role in raising prices abroad, for example.

But prices in the U.S. would likely be lower without the tariffs and be closer to the European market, which has enjoyed a more limited price jump, according to Brandt. The resulting higher prices could spell trouble for a country trying to boost its economy with infrastructure spending.

"Assuming the billion-dollar infrastructure bill gets passed, simplistically what this means is at current steel prices, less airports get built and less bridges get built," Brandt said. "The impact of the program is diminished by higher commodity prices."

Excitement at home

The Biden administration has so far kept the steel tariff in place, and steel executives have expressed strong optimism about the domestic market.

U.S. Steel President and CEO David Burritt recently told investors that the company is bullish for a "stronger for longer" market in part due to the "low levels of steel in the supply chain." Mark Millett, president and CEO of Indiana-based Steel Dynamics Inc., said on a first-quarter earnings call that maintenance outages already announced by steel producers would ensure supply "will absolutely remain tight" and "support the market."

"We are not greedy. We are realistic," Cleveland-Cliffs President and CEO Lourenco Goncalves said on an April earnings call. "That's why steel prices are where they are, and that will continue going forward."

U.S. steel output reached 83.6% of production capacity July 10, compared to 60.3% at the same point in 2020, according to data provided by the American Iron and Steel Institute. The 83.6% figure is an increase from the level of capacity in use before lockdowns swept through the U.S. at the start of the pandemic, institute President Kevin Dempsey noted in an interview.

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Ending the tariffs would not impact prices, Dempsey said. "The market is going to do what the market is going to do," the industry representative said, adding that there will be "plenty of steel available" for any infrastructure funded under legislation being debated on Capitol Hill.

Opponents of the tariffs, including a large number of U.S. manufacturers that consume steel, disagree. The U.S. has become an "island of high steel prices," at least partially because of the tariffs, Paul Nathanson, executive director of the Coalition of American Metal Manufacturers and Users, told Market Intelligence.

"It's a huge problem and growing worse for U.S. users," Nathanson said. "We can't get enough steel for our manufacturers."