U.S. Steel Slumps as New Mill Plan Raises Oversupply Fears

(Bloomberg) -- U.S. Steel Corp. fell the most since June as the steelmaker’s plan to build a new mill sparked concerns that the addition of new capacity may flood the market.

The steelmaker said Thursday it will spend about $3 billion to build the so-called mini mill that will combine two electric arc furnaces, which primarily use steel scrap and are far more energy-efficient than traditional integrated plants fed by coal. The company expects to begin construction in the first half of 2022 and start producing in 2024, with an expected annual capacity of 3 million tons of flat-rolled steel products.

Shares of U.S. Steel fell as much as 9%, the biggest drop since June 17, and traded 8.4% lower at $23.26 as of 3:01 p.m. in New York.

New capacity may “fuel concerns about a potentially oversupplied market with negative implications for steel prices,” Morgan Stanley analyst Carlos De Alba said in a note. A new electric arc furnace “may be a good investment” compared to deploying existing blast-furnace assets, “but it would consume all the free cash flow we currently model” from the first quarter of 2022 until the second quarter of 2024, De Alba added.

U.S. Steel Falls as Analysts Question Mill Plan: Street Wrap

U.S. Steel’s announcement comes as domestic futures prices have more than tripled in the past year. While this has produced a windfall for domestic suppliers, it’s driving up the cost of a range of goods from automobiles and wind turbines to kitchen appliances as the world recovers from the pandemic.

Credit Suisse analyst Curt Woodworth expects “there will be offsets on the integrated side” and sees U.S. demand increasing with a 3% to 4% compound annual growth rate during the next several years despite the upcoming capacity from the new mill.

“We continue to believe the market is significantly underestimating the earnings power” for U.S. Steel in 2022-23, he said.

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