President Trump's decision to impose tariffs of 25% on steel and 10% on aluminum from all countries is moderately positive for U.S.-based steel and aluminum producers. In our view, these actions will encourage domestic production, raise utilization rates, and keep domestic prices elevated over the next two to three years. Steel prices in the U.S. could remain around $750-$850 per short ton (st) over this period. At the same time, we assume aluminum prices will remain elevated but flat at $2,100 per metric ton (mt) through 2020 as production in China and elsewhere outside the U.S. increases, likely offsetting any material near-term jump in prices as a result of the recent trade action. However, the potential gains for these companies from trade barriers would only be temporary if the U.S. returns to a less protectionist stance more consistent with the last 30 years.
Over the next 12-24 months, we expect to see the potential for positive rating actions among U.S.-based metals and mining downstream issuers most exposed to steel and aluminum prices--particularly speculative-grade companies and those in the 'B' category (rather than some higher-rated investment-grade companies). These positive outlooks are due to stronger cash flows from higher prices, as well as debt-reduction and refinancing efforts. We have positive outlooks on U.S. Steel Corp., Steel Dynamics Inc., AK Steel Corp., Big River Steel LLC, Alcoa Corp., and Century Aluminum Co. However, we continue to stress that debt maturity walls in 2019 and 2021 are potential headwinds to near-term upgrades in the sector.
U.S.-based steel producers such as Nucor Corp., U.S. Steel, Steel Dynamics, Commercial Metals Co., AK Steel, and Big River Steel will likely enjoy elevated steel prices and volumes if imports drop. This assumes overall demand remains robust (which we expect), with real GDP growth greater than 2%, healthy nonresidential construction, and recovering oil markets, while Chinese steel prices remain elevated. In our view, the impact of a 25% tariff on all imports will likely widen the historical spread between domestic and foreign steel (particularly steel from China, which accounts for roughly 50% of global steel production). The spread could be pushed up to $250-$375/st due to the 25% tariff increase, up from a typical spread of $200-$300/st over the past five years. Nevertheless, U.S. steel prices are still correlated with steel prices in China, which also remain elevated. Since the U.S. is not an economic island, any material decrease in Chinese steel prices (potentially due to slower economic growth and construction and investment in China) would increase the spread between domestically-produced steel and imported steel, likely causing U.S. steel prices to retreat.
Table 1.
Economic Data | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Key indicator | ||||||||||
2017e | 2018e | 2019e | 2020e | |||||||
U.S. real GDP (% change) | 2.3 | 2.8 | 2.2 | 1.9 | ||||||
U.S. nonresidential construction (% change) | 5.2 | 1.7 | 4.1 | 3.1 | ||||||
China real GDP (% change) | 6.8 | 6.5 | 6.3 | 6.2 | ||||||
Light vehicle sales (mil.) | 17.2 | 16.9 | 16.7 | 16.8 | ||||||
Aluminum $/ton* | 1981 | 2100 | 2100 | 2100 | ||||||
Crude oil ($/bbl, WTI)* | 50.91 | 55 | 55 | 55 | ||||||
Crude oil ($/bbl, Brent)* | 54.74 | 60 | 55 | 55 | ||||||
*2017 actual average price. S&P Global Ratings price assumption for 2018-2020. | ||||||||||
E--Estimate. WTI--West Texas Intermediate. bbl--Barrel. |
Meanwhile, the aluminum tariff resulting from the U.S. Department of Commerce's Section 232 investigation could spur some restarts at idled facilities in the U.S.--specifically Century Aluminum and Alcoa--throughout 2018. While the domestic aluminum industry operates at approximately 40% capacity, according to the Section 232 report, the U.S. is only capable of producing slightly less than 2 million mt at full capacity--significantly lower than the roughly 5.5 million mt of primary aluminum demand in the U.S. Any attempt to greatly increase this capacity would require large amounts of capital spending to build new facilities, which would take years and need to be validated by a long-term shift in the competitive position of U.S.-based assets.
Ultimately, higher input prices for steel and aluminum will likely filter down to other sectors, pressuring the costs, margins, and pricing power of downstream producers of consumer products such as beverage cans and cars, and to infrastructure and construction, such as buildings and bridges.
Chart 1

Table 2.
U.S. Steel And Aluminum Companies Ratings And Outlooks | ||||||||
---|---|---|---|---|---|---|---|---|
Issuer Name | Rating | Outlook | Primary Metal Exposure | |||||
Aleris International Inc. |
B- | Stable | Aluminum | |||||
JW Aluminum Co. |
B- | Stable | Aluminum | |||||
AK Steel Holding Corp. |
B | Positive | Steel | |||||
Allegheny Technologies Inc. |
B | Stable | Steel | |||||
Big River Steel LLC |
B | Positive | Steel | |||||
Century Aluminum Co. |
B | Positive | Aluminum | |||||
Phoenix Services International LLC |
B | Stable | Steel | |||||
Ryerson Holding Corp. |
B | Stable | Steel/Aluminum | |||||
U.S. Steel Corp. |
B | Positive | Steel | |||||
GrafTech International Ltd. |
B+ | Stable | Steel | |||||
TMS International Corp. |
B+ | Stable | Steel | |||||
Zekelman Industries Inc. |
B+ | Stable | Steel | |||||
Atkore International Inc. |
BB- | Stable | Steel | |||||
SunCoke Energy Inc. |
BB- | Stable | Steel | |||||
Alcoa Corp. |
BB | Positive | Aluminum | |||||
Commercial Metals Co. |
BB+ | CW/Neg* | Steel | |||||
Kaiser Aluminum Corp. |
BB+ | Stable | Aluminum | |||||
Steel Dynamics Inc. |
BB+ | Positive | Steel | |||||
Arconic Inc. |
BBB- | Stable | Aluminum | |||||
Carpenter Technology Corp. |
BBB- | Stable | Steel | |||||
Reliance Steel & Aluminum Co. |
BBB | Stable | Steel/Aluminum | |||||
Worthington Industries Inc. |
BBB | Stable | Steel | |||||
Nucor Corp. |
A- | Stable | Steel | |||||
*Due to the pending acquisition of cetain Gerdau assets |
Related Criteria And Research
- Recent U.S. Trade Actions Likely A Show Of Force But Neutral For Credit Quality in U.S. Steel And Aluminum Companies, June 12, 2017
- Metals Retain Their Lustre: S&P Global Ratings Raises Metals Price Assumptions Again, Dec. 4, 2017
- Criteria - Corporates - Industrials: Key Credit Factors For The Metals And Mining Downstream Industry, Dec. 20, 2013
- Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
Primary Credit Analysts: | Michael Maggi, CFA, New York (212) 438-7302; Michael.Maggi@spglobal.com |
William R Ferara, New York (1) 212-438-1776; bill.ferara@spglobal.com | |
Secondary Contact: | Donald Marleau, CFA, Toronto (1) 416-507-2526; donald.marleau@spglobal.com |
Contributor: | Dan Daley, New York; dan.daley@spglobal.com |
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