Thank you for the honor of speaking today to such an important steel conference.
When I was asked in early August by Handelsblatt to provide an abstract of my comments to be made in March of 2009, my focus was on the recession that at that point had not arrived. The Financial Times, during about that time, famously said, “A funny thing happened on the way to the most predicted recession in history, it never arrived.”
In August, the American steel industry itself was in the midst of its most profitable quarter ever and members of our institute were also in the process of setting records for exports of steel from the US, working, of course, with American steel companies. Higher prices in many international markets than in the US – usually a one in ten year phenomenon – resulted approximately 13 million tons of exports (the exact final number is still pending), with of course Canada and Mexico leading the list, but with the EU, China and India conspicuously on the list of major receivers of American-made steel. On February 11 at a press roundtable, our members encouraged the American steel industry to commit to that level of involvement in international markets in the future. American made steel has been very positively received by international customers and a commitment to continue to supply them by the US mills will obviously have many benefits for the mills, the customers and AIIS’s company members. European mills understand instinctively that participating in the international markets with a certain percentage of their production is a good long term strategy, regardless of the timing of the exports in the business cycle or the value of the currency. We hope the American mills will develop that kind of thinking as we go forward.
Imports struggled during the year while the domestic industry was setting profitability records. High freight rates, a weak dollar and more attractive prices in places as diverse as Turkey, Russia, Oman and of course the EU, made the normal trading companies’ business hard to conclude. That said, by the end of the year, 32 million net tons of imports arrived to fill the systemic gap that exists between what the American mills can produce and what the consumers require. As an aside, I would like to point out that the US is unique in developed countries in that regard. No other developed country with a steel industry makes less steel year after year than is needed in their home market. When one considers this, one has to come to the conclusion that American steel consumers are a hardy and competitive lot. As noted above, in nine out of ten years, they pay higher prices for steel than their international competitors and yet they survive. Notwithstanding the protectionists claim that American manufacturing is dying, US manufacturing output and profitability was at all time records in 2006 and output increased in 2007 and profitability was at near record levels. We don’t have data for 2008 as yet, but clearly the last quarter of the year especially was not good.
At a major steel conference in New York City in June last year, steel executives were euphoric, with profits soaring, stock prices at all-time or near all time highs and the only concern in the room seemed to be where the mills would spend all their profits. New projects were being touted and rumors about which of the smaller mills left in North America would be gobbled up next was on everyone’s mind. One analyst, Peter Marcus – co-host of the conference – titled his presentation, “Spot steel sheet prices to plummet in the second half of 2008.” Peter’s reputation preceded him and so he needed to be taken seriously, but most in the room did not see the six reasons he gave for his predicted collapse.
Now, even the analysts who say they predicted the collapse, say they did not see the severity nor the rapidity of the collapse. While everyone knows the source of the international economic problems is connected to banking and liquidity, for steel, there were other significant factors as well. Rising costs for steel, steelmaking raw materials, increasing inventories and the pressure that the high steel prices put on credit lines for everyone in the supply chain finally took their toll. In early fall, the market tanked, as we all know.
Where are we now? The decline in US steel prices started slowly at first and then accelerated. Steel buyers are predictable in their reactions to market shifts. When the market is going up, the first buyer in line gets the best price and so buyers rush to buy and often over-buy. When the market is going down, the last buyer in line gets the best price and so everyone waits to be the last buyer, buying only what is absolutely necessary. With this happening throughout the supply chain and into the manufacturing sector as well, it is not surprising that late in 2008 when someone asked what the market price of a particular product would be, the answer was, no one knows, no one is buying……
Today, inventories, not surprisingly, are at low levels, although it is difficult to determine how low (short of real holes in inventory) since, again, business is so slow. That said, the data available to us from the Metal Service Center Institute, suggest that in December, there was a net reduction of inventories by 500,000 net tons. Prices are low, raw material costs have declined substantially and with low inventories, any increase in demand should result in an improvement in pricing and profitability. The optimists at this time, and there are some, believe that it will be an inventory re-stocking that will drive demand in the first quarter, not a rebound in real consumption. The second quarter, seasonally the strongest, is open to questions.
The macro-economic factors affecting steel demand for the domestic industry as well as importers are, as is well known, poor. The auto sector is moribund, as is most of manufacturing. The non-residential construction sector, which kept the steelmakers and importers stronger than the economy as a whole last year is also weak, and still weakening. Good news is hard to find. A recent report of home sales shows some reason for optimism, as sales rebounded of existing homes in early 2009, suggesting that not only might the housing market have reached its nadir, but also that financing may finally be easing too. Since housing is considered a leading indicator, we hope that this is the leading edge of the recovery.
With the low interest rates now and the struggling banks improved liquidity (thanks to infusions of cash from the federal government), there is some hope that the low interest rates may spark some revival of the economy. In the US, the key to economic health is consumer spending accounting, according to economists, for some 70% of GDP. While consumer spending is not steel intensive, an increase in spending by consumers will clearly have a positive effect on all segments of the economy, for steel, starting with the auto sector – also a leading indicator.
Of course, all the talk these days in Washington DC centers on the stimulus package and the hope that it will help jump start the economy. Unfortunately, aside from the infusions of cash to the banks, and business tax cuts incentivizing investment etc., most objective analyses of the bills under consideration suggest that the economic impact of the new federal spending will not impact the economy until at the earliest some time in the second half of 2009. Some economists believe that, left alone, the economy will be on its way to recovery by the time the stimulus package has any significant impact.
For steel importers, 2009 starts, of course, with the same demand problems. That said, two elements that made 2008 difficult for importers throughout the year have abated: high freight rates – which have declined considerably from their peak for break bulk cargo ships – and the value of the dollar, which has regained significant strength from mid-2008.
At AIIS, we conduct a monthly survey of our importing companies. In late 2008, that survey showed that import ordering levels were very low for most products. This suggests that, with the time from ordering to arrival in the US of non-NAFTA products of 3-5 months, imports will be very low during the first quarter of 2009. Current import ordering levels have improved somewhat, but remain depressed.
What do we expect for the remainder of 2009? We see an interesting trend starting with steel pricing. Recent data show that the US is poised to regain again its position as the highest priced steel market. This, when coupled with lower freight rates, should improve conditions for importing again. And there are some steel analysts who see an improvement in orders as soon as late first quarter, especially for the mini-mills, who are less tied to the auto sector’s health.
In addition, with the world economy in doldrums, it is noteworthy that steel prices in China are moving up and at a rapid pace. According to reports, this is due to internal demand – obviously, demand for exports is poor. When we look back at the end of 2003, when the American steel industry and steel market had been suffering from weak demand and pricing, losses and bankruptcies for 3-4 years, it is clear that strong demand and pricing in China lead the world steel industry into a new age of higher prices for its products, as well as raw materials, etc. Internal Chinese prices, not export prices (which are higher) are now slightly higher for hot rolled sheet than in the US. If this trend continues, it is possible that the Chinese market will again stimulate the international steel market again, leading us out of yet another crisis period. I admit that this is an optimistic scenario, but past is often prologue.
Thank you for your kind invitation to speak today. Thank you for your attention and I will be pleased to answer any questions. |
