Investing in the volatile steel industry can put your funds and immigration outcome on the line.
Each year, hundreds of foreign nationals choose to invest in the EB-5 visa in hopes of getting U.S. Green Cards for themselves and their families. You may be considering the EB-5 visa because of its fast immigration and straightforward process.
However, investing in a qualifying U.S. real estate project and applying for the EB-5 visa does not guarantee that you will get a Green Card—or get your invested $800,000 back. Both of these outcomes largely depend on the financial strength of the real estate project you invest in. And certain industries carry a much higher risk of financial failure. Steel manufacturing is one of the riskiest industries for EB-5 investors.
In this article, we outline why making an EB-5 investment in a steel manufacturing plant is a high-risk option for EB-5 investors. As we will see below, analyzing an EB-5 project’s industry, current market trends, and capital structure is a key part of the project selection process.
We also provide a list of several recent bankruptcies and failures in steel projects to illustrate the financial danger these projects pose to EB-5 investors.
EB5AN hopes that this overview of current trends in the steel manufacturing industry will help you protect both your immigration goals and hard-earned funds.
First, we explain the two major risk factors involved in making an EB-5 investment.
- 1. Volatile Steel Prices and Supply/Demand Levels
- Why Are Steel Prices Volatile?
- Recent Trends in Steel Prices
- What Do Falling Steel Prices Mean for EB-5 Investors?
- 2. High-Risk Capital Structures in EB-5 Steel Projects
- 3. Early-Stage Steel Projects Pose a High Immigration Risk
- 4. Examples of Failed Steel Projects
Risk Factors for EB-5 Investors
USCIS requires all EB-5 funds to remain “at risk”; EB-5 investors must be open to either financial loss or gain. As an EB-5 investor, you are not allowed to get a contractual right to repayment of your funds.
Therefore, whether you get your invested money back depends on the financial performance of the EB-5 project you invest in.
Before investing, ask yourself: “Am I reasonably certain that this EB-5 project can make enough profits to repay its EB-5 investors in a timely manner?”
Simply making an EB-5 investment does not guarantee that you and your family will get U.S. Green Cards. Rather, USCIS will only grant you a permanent Green Card if the EB-5 project you invest in uses your funds to create at least 10 jobs.
In most cases, EB-5-eligible jobs are calculated based on a project’s construction spending or revenue. The best practice is to invest in an EB-5 project that will create your required jobs through construction spending.
Therefore, a project’s financial strength is crucial to your immigration outcome.
Before investing, ask yourself: “Is this project well-capitalized enough to carry out significant construction spending, creating at least 10 jobs for each EB-5 investor?”
Immigration and Financial Risk Factors in EB-5 Steel Projects
The unpredictable nature of the steel market makes it very uncertain that steel manufacturing developments will be able to succeed financially.
In the following video, Siddharth Agarwal, a Bay Area-based investment banker who recently made an EB-5 investment, discusses some of the risks of investing in a steel manufacturing EB-5 project:
1. Volatile Steel Prices and Supply/Demand Levels
Why Are Steel Prices Volatile?
Steel prices are volatile due to its status as a commodity. Commodities are raw materials or primary agricultural products that can be bought and sold.
The market for commodities is primarily driven by supply and demand, both of which can change rapidly and dramatically based on various factors—and steel is no exception.
Supply dynamics play a significant role in the fluctuation of steel prices. The production of steel involves mining iron ore, processing it, and then refining and manufacturing the finished product.
Any disruptions in this supply chain can lead to changes in steel prices. For instance, if there’s a strike at a major iron ore mine or if production challenges arise at a major steel mill, it can lead to a shortage in steel supply. In the short term, such a shortage might increase steel prices.
On the other hand, overproduction or an oversupply of steel can lead to a rapid decrease in its price as producers try to offload their surplus inventory.
Demand dynamics are equally influential. Steel is a key input in many industries, including construction and automotive. If any of these sectors experiences a downturn, it could result in reduced demand for steel.
For instance, during economic recessions, construction projects might get halted or postponed, leading to decreased demand for steel. Similarly, if the automotive industry faces challenges, like a decrease in car sales due to economic factors or technological shifts, it can quickly reduce the demand for steel.
Global events and geopolitical tensions can also impact steel prices. Trade wars, tariffs, and sanctions can influence the cost of steel. If two major steel-producing or consuming countries engage in a trade dispute, it might lead to tariffs being imposed on steel imports. If these tariffs lead to an excess of steel in the market because producers can’t export their products, prices may sharply decrease.
Currency fluctuations also play a crucial role. Steel is traded on the global market, and transactions typically occur in dominant global currencies like the U.S. dollar. If the value of the dollar rises significantly against other major currencies, it can make steel more expensive for buyers outside the U.S. This can reduce demand and lead to falling steel prices.
The competitive nature of the steel industry further compounds these fluctuations.
With numerous producers worldwide, each with varying production costs, there’s a constant tug-of-war on pricing. Producers in countries with lower production costs might undercut those in countries with higher costs, leading to price wars that can result in rapid price decreases.
Now, let’s examine the specific ways in which these factors are affecting the steel manufacturing industry today.
Recent Trends in Steel Prices
The latest market research shows that the price of steel is highly unpredictable—with significant decreases on the horizon.
IBISWorld, a leading industry research and analytics firm, published an exhaustive report on trends in steel manufacturing in January 2023.
Recent steel prices have shown remarkable volatility, especially since the COVID-19 pandemic.
In 2023, steel index prices are seeing a decrease of 13.8%. IBISWorld projects this value to decrease even further in 2024, by an even larger percent change of -29.2%.
Accordingly, the steel industry saw significant revenue decreases in 2022. Steel revenues fell 13.9% in 2022 and are decreasing even further in 2023, by 22.4%.
22.4% steel revenue decrease in 2023.
The index price of steel is projected to decrease in 2025, without significant increases through 2028.
Lower Demand Leads to Lower Steel Prices
Steel prices depend directly on demand. With lower demand and a larger existing supply of steel, prices are expected to continue to fall. The following market conditions are currently lowering demand for steel in today’s unstable economy.
High Interest Rates
In 2023, the Federal Reserve has raised interest rates to the highest level in 22 years. Many analysts expect further interest rate hikes in the coming months.
The high-interest-rate environment has created a market with very few lenders willing to risk their capital on large real estate projects like steel plants. In 2023, JP Morgan and Bank of America paused financing for commercial real estate ventures.
Morgan Stanley managing director Betsy Graseck recently told the Economist that securing a loan is significantly harder under current interest rates: “In the most recent senior-loan-officers survey every single question they asked bankers about financial conditions flipped to tightening, all at once. I have never seen that before.”
High borrowing costs and inflation, discourage investment in infrastructure and non-residential real estate, as the cost of financing a large-scale project increases.
This also means that steel manufacturers will likely slow production.
With high interest rates, fewer traditional lenders are willing to risk their capital on a large real estate project.
Downturns in the Non-Residential Real Estate and Automobile Industries
As mentioned above, real estate developers will now find it more difficult to secure financing for large commercial, industrial, and infrastructure projects. Office buildings, hospitals, factories, and similar structures are typically framed with steel, making non-residential real estate crucial to the steel industry.
Non-residential construction has not yet recovered to pre-pandemic levels, which has prevented growth in steel manufacturing.
The automobile sector, another pillar of the steel market, has also decreased its steel purchases. New federal- and state-level fuel efficiency requirements have driven automakers to use lighter materials, such as aluminum, to frame their vehicles.
As steel demand and prices continue to fall, buyers such as automakers and real estate projects hold off on buying steel, hoping to get a lower future price and only buy what is necessary for their operations.
This, in turn, drives down demand and prices further.
China Dominates Global Steel Production, Wages “Economic War” with the U.S.
With much economic uncertainty ahead for the United States, a growing percentage of global steel demand will now be met by foreign manufacturers, particularly in China. Foreign steel manufacturers often receive government subsidies.
According to the World Steel Association, China produced over 1 billion tonnes of crude steel in 2022 alone. This represents 52.9% of global steel production, making China the world’s largest producer.
China’s enormous manufacturing capacity and lower wages will likely continue to secure its leading position in the global steel market. S&P Global Commodity Insights reports that China’s iron and steel production capacity has continued to grow in 2023, with further increases in view for the 2023-2025 period.
China produced 52.9% of the world’s steel in 2022.
Chinese steel is often cheaper for both U.S. and foreign buyers. In contrast, with an appreciating U.S. dollar, U.S. steel has become less competitive in foreign markets. As domestically produced steel also becomes more expensive, foreign steel is now more attractive to U.S. developers and automakers.
In addition, China’s enormous steel output has created a global excess, which will have the long-term effect of keeping prices low.
In “Why the World Has Too Much Steel,” the Economist explains that the “flood of Chinese steel around the world should have caused high-cost producers elsewhere to extinguish their blast furnaces, eventually allowing supply and demand to reach a new equilibrium. But because steel is often seen as a strategic industry […], governments are usually keen on propping them up, either through subsidies or nationalization.”
Growing political tensions between both countries could create further difficulties for U.S. steel manufacturers, as the United States and China engage in what Foreign Policy describes as an “economic war”.
Chinese President Xi Jinping recently remarked that “competition for tech dominance will grow unprecedentedly fierce.” And the Economist warns that Sino-American relations have “become more embittered and hostile than ever. […] The only thing both sides agree on is that the best case is decades of estrangement.”
Further, President Biden has already banned investments in certain tech sectors in China. Analysts believe that both countries could eventually impose higher tariffs on each other’s goods.
How could escalating tensions with China harm U.S. steel manufacturing?
With higher mutual tariffs, U.S. steel could become even less competitive in foreign markets where Chinese steel is also sold. Further, alloys, additives, equipment, and other materials necessary for steel production are often sourced from China. A disruption to these supply chains could increase U.S. steel production costs.
Further, the success of the steel industry depends on wider macroeconomic conditions—consumer spending, general employment levels, and industrial production. If China pursues a more aggressive trade war with the U.S., it will harm the overall economy and steel manufacturing.
Manufacturing Steel in the U.S. Is Expensive
Steel manufacturing costs in the U.S. are growing, making domestic steel manufacturing plants an increasingly risky asset class to invest in.
Labor is significantly more expensive in the United States than in other countries, with a higher minimum wage. Historically, wages have been particularly high in the steel industry, with a $106,978 average wage for steelworkers in 2023. Wages are expected to grow in 2024.
Steelworkers have been able to secure high wages by forming labor unions. The United Steelworkers Union (USW) is the largest industrial union in North America, with over 850,000 working members.
It is worth noting that the USW’s union labor contract expired on September 1, 2022, and wage disputes have already led to a strike by Chevron employees. If steelworkers continue to negotiate for higher wages, steel manufacturing plants may be subject to increased costs in an already-challenging market environment.
The United States’ strict labor, environmental, and workplace safety regulations impose further costs on steel manufacturers.
In fact, U.S. steel manufacturers are increasingly acquiring foreign manufacturers and facilities to minimize expenses.
What Do Falling Steel Prices Mean for EB-5 Investors?
Because of high interest rates and the ensuing downturn in industries that rely heavily on steel, financial projections for under-construction steel manufacturing facilities may no longer be profitable.
With a lack of long-term steel purchase contracts, steel manufacturing projects may simply be unable to secure the financing needed for completion—lenders are unlikely to consider them creditworthy.
When this happens to an EB-5 steel manufacturing project, the most likely outcome is for construction to stop.
Under-construction steel projects may be unable to secure enough financing for completion
The EB-5 investors in this project would lose all of their invested money and their U.S. Green Cards as well.
Even if an EB-5 steel project does get completed, its EB-5 investors may not get a return on their funds.
Falling steel prices mean that the project may not be able to get further loans or attract equity investors. And, with fewer steel manufacturers in the U.S., there is a lack of potential buyers for steel manufacturing facilities. Instead, U.S. steel manufacturers are moving their operations abroad to reduce costs.
In any of the above scenarios, the steel project would be unable to repay its EB-5 investors.
2. High-Risk Capital Structures in EB-5 Steel Projects
Non-Traditional Lenders: A Major Red Flag
Steel manufacturing is a high-risk asset class to invest in, not only for EB-5 investors, but also for traditional lenders.
In many cases, major U.S. banks will not find steel plants creditworthy, and will refuse to risk their funds on these projects. Instead of a highly cyclical industry that depends on volatile prices, reputable banks look for projects with a steady income and a low risk of default on loan payments.
This leaves steel manufacturing projects to look for alternative—and much more expensive—lenders.
EB-5 steel projects are often unable to secure financing from traditional lenders.
Often, EB-5 steel projects secure financing, not from major banks, but from non-traditional lenders such as private credit funds or hedge funds.
Private credit funds and hedge funds often invest in much riskier ventures than traditional lenders. They raise money from high-net-worth individuals or institutional investors who invest in high-risk alternative assets.
Since their investors ask for very high returns, private credit funds and hedge funds loan their capital to EB-5 projects at a much higher rate of return.
What does this mean for EB-5 investors in steel projects?
In the likely scenario that the steel plant encounters financial difficulties and is unable to pay all of its loans, the senior lender (in this case, the private credit fund or hedge fund) will get priority. The senior funding was loaned at a very high rate of return, so the most likely outcome is that there will be no funds left to repay the EB-5 investors.
As an EB-5 investor, would you prefer to invest your funds and your immigration outcome in a project with a high-risk, non-traditional senior lender—or in a project that has been evaluated and found creditworthy by a major bank?
In fact, non-traditional lenders sometimes lend to companies at high interest rates hoping the borrower will default on payments. This would allow the lender to effectively acquire the EB-5 project through equity ownership—another disastrous outcome for EB-5 investors’ financial and immigration goals. This strategy is known as “loan-to-own.”
An alternative investment management firm like Blackstone, with $1 trillion in assets under management, can afford to invest in high-risk ventures like steel manufacturing projects.
But EB-5 investors do not have the same level of risk tolerance.
Reliance on EB-5 Funding
Other steel projects rely on EB-5 financing for completion, having failed to secure a senior loan from another source. EB-5 funding may make up a large part of the project’s capital structure.
And in some cases, a steel project has raised no financing and has not started construction—and asks you, an EB-5 applicant, to be the first one to invest in the project.
This indicates that the project has very weak financials.
Struggling projects like these are unlikely to raise all of their projected EB-5 funding, leaving you without a return on your funds or a Green Card.
Would you prefer to invest in a project that relies on EB-5 funding (that it hasn’t raised yet, and may not raise at all), or in a project that has already secured a senior loan with a major U.S. bank?
3. Early-Stage Steel Projects Pose a High Immigration Risk
EB-5 steel projects are often in the very early stages of construction—or have not started construction at all. As mentioned at the outset, each EB-5 investor must create at least 10 jobs, which are calculated based on a project’s construction spending or revenues.
In light of the above risk factors, investing in an early-stage EB-5 steel project may prevent you from getting the 10 necessary jobs to immigrate. The project could fail to raise enough financing to make significant construction spending. And a steel project will only generate revenue several years in the future, if at all.
EB-5 projects that have not purchased the land to begin with put you at even greater risk—you could lose your entire investment and receive a USCIS denial for your immigrant petition.
On the other hand, other EB-5 projects currently on the market have already created all of the necessary jobs for all their EB-5 investors. USCIS allows spending made before you invest to count toward fulfilling your 10-job requirement.
Why invest in a project with zero job creation instead of a project with all jobs already created?
If you invest in an EB-5 project that has already created the necessary jobs, this significantly reduces your immigration risk.
Why put your Green Card at risk when you can invest in an EB-5 project that has already created all the necessary jobs for its EB-5 investors?
4. Examples of Failed Steel Projects
The following list shows selected examples of steel manufacturing companies that have filed for bankruptcy.
It is unclear whether any of these projects raised funding from EB-5 investors. If they did, the EB-5 investors lost their capital, and, most likely, their chance of getting a Green Card.
Before Investing in an EB-5 Project, Get Answers to These Questions
As an EB-5 investor, your chances of getting a U.S. Green Card and your invested money back largely depend on how carefully you evaluate an EB-5 project before investing. It’s essential to do research on the project’s industry and target market.
Still, another crucial step of the project selection process is to read the project’s offering documents. Unlike verbal assurances, the information in the offering documents is legally binding.
Always insist on reading the offering documents before investing in an EB-5 project.
Inconsistencies in a project’s offering documents are an important red flag. USCIS may ask for further evidence for your EB-5 petition due to these inconsistencies, or deny your petition altogether.
Besides reading the offering documents, asking for written answers to key questions about the project can also reveal hidden risks.
Getting written answers to the following questions will allow you to gauge the financial and immigration risk of an EB-5 project.
EB-5 Project Selection Question List
1. Does the borrower (that is, the project developer) have a 20+ year track record of successfully repaying all of its debt? Has the borrower raised EB-5 funds for prior similar projects and successfully repaid EB-5 investor funds?
If the developer has previously defaulted on loans, this increases investor risk. The best developers in the EB-5 market have successfully repaid EB-5 investors in several previous projects.
2. Has the project secured a senior loan? Is the project willing to provide a copy of the loan agreement? Or are its financing agreements yet to be signed?
If no senior loan has been secured, and no financing agreements have been signed, the project does not have the necessary funding to reach completion. In this case, it likely depends on raising EB-5 funding.
3. How much developer equity has been irrevocably committed to the project? How much of the project’s capital structure will be EB-5 funding? How many other sources of investment are ahead of EB-5 funds in term of repayment?
The more developer equity is committed, the greater the developer’s economic interest in the project. On the other hand, if the targeted EB-5 capital raise is greater than the developer equity, most of the financial risk will shift to the EB-5 investors. The more sources of capital ahead of EB-5 investors, the higher the risk for EB-5 investors.
4. Have all the required EB-5 jobs already been created?
Investing in a project that has already created the needed jobs significantly raises your chances of getting a Green Card.
5. How long is the EB-5 loan term, and can it be extended? Is there a minimum initial disbursement amount of EB-5 funds?
Many successful EB-5 projects offer 5-year loan terms, without extensions. This loan term is suited to EB-5 investors’ immigration timeline, as the funds must remain invested until an investor finishes their two-year conditional residence period.
On the other hand, loan terms that can be extended to 8 years or more are risky. More issues that affect the project’s finances could arise during this period.
If there is a minimum initial disbursement amount for the EB-5 funds, the first EB-5 investors in the project may have to wait for additional months or years before their loan terms begin.
There is no telling how long the project will take to raise enough EB-5 funds to meet the initial disbursement amount.
6. Does the project offer an I-526E denial refund guaranty?
This allows an EB-5 investor to get an accelerated repayment of their funds if his I-526E petition is denied.
7. Is the value of the collateral used for the EB-5 loan sufficient to repay the EB-5 loan?
If the collateral is not enough to cover the EB-5 loan, the project may fail financially and leave its EB-5 investors with a capital loss. The collateral should always be more than sufficient to repay all the EB-5 investors.
8. Will the EB-5 funds be held in escrow before being disbursed to the project?
Reliable EB-5 projects place their investors’ funds in escrow, typically until an investor files Form I-526E. This adds a further layer of protection for the EB-5 funds.
9. Does the project already own the land it will build on, or does it have a lease on the land? Is there a purchase agreement in place?
If no land has been acquired, or the project does not even have a purchase agreement for the land, there is no telling whether the project will be able to move forward at all.
10. If the project claims to have a potential customer, has the customer entered into a binding purchase agreement?
If this is not the case, there is no support for any future sales estimates the project makes based on this customer’s business.
Protect Your Invested Funds and Immigration Outcome
Making an EB-5 investment implies a degree of financial and immigration risk. Still, you can significantly reduce your risk by choosing an EB-5 project in a more stable industry than steel.
Single-Family Home Projects: A Low-Risk Asset Class
Look for EB-5 projects that are already profitable and don’t depend on price projections years into the future. For example, single-family home projects can start selling units relatively quickly and adjust construction to current demand.
Single-family home developments can become profitable far more quickly than other asset classes.
If a single-family home EB-5 project has already built and sold a significant number of units and is profitable, this proves that the project is financially viable. EB-5 investors in a project like this will not have to rely on uncertain revenue projections; rather, the project is already demonstrating its financial strength.
Such a project is very likely to provide a timely return for its EB-5 investors and create all the needed jobs for immigration. The jobs may already be created before you invest in the project.
The capital structure of EB-5 single-family home projects is usually safer as well. Major banks are often more comfortable providing senior loans for asset classes with a steady income. This means that, in the capital structure, EB-5 investors are typically subordinate only to the senior bank lender.
Compared to non-traditional lenders like private credit funds and hedge funds, major banks typically lend at a much lower rate of return. This increases the EB-5 investors’ chances of being repaid.
The developer’s track record is also an important risk indicator. If the developer has a track record of never failing to repay a loan or complete a project over a 25-year period (including economic downturns), this indicates a high level of security for the EB-5 investors.
Learn More About Safe EB-5 Investing
Be sure to get written answers to your questions about each potential EB-5 project, and review the offering documents.
EB5AN is one of the EB-5 industry’s leaders in investor education. Our goal is to make sure our investors are fully aware of the risks involved, allowing them to make informed decisions.
For more information on how to find an EB-5 project for both immigration success and a return on your funds, schedule a free consultation with EB5AN.