CISA & MC – CCPIT
Beijing, China
March 19-20, 2008
Presented by: David Phelps, President, American Institute for International Steel
I want to thank the Chinese Iron and Steel Institute for the opportunity to speak to this important conference again. I am proud to represent the members of the American Institute for International Steel, the only US-based steel trade association that promotes real free trade in steel. AIIS represents North American steel importers and exporters, distributors, processors, port authorities, stevedoring firms, customs brokers, freight forwarders, ocean carriers, railroads, trucking firms and one steel producer and a bank. In short, everyone in the steel supply chain in our market.
STEEL MARKET OVERVIEW
The US steel market and US economy seem to contain a series of contradictions. While the banking crisis has created the environment for a recession that many believe is already here, the domestic steel industry has been raising prices, producing at full capacity and for some products, putting customers on allocation. Many sectors of the economy are weak, autos, housing and white goods and if one asks steel executives from mills or service centers, they seem mostly to agree that demand is not all that strong, with of course some exceptions, such as in energy related markets.
The steel market in 2007 was weaker than in 2006 to be sure, with imports down by 26.6%, shipments down by 3.1% and the overall market down by 10%. However, the steel market was not as weak as the data suggest due to unusually high inventories at the beginning of 2007, which turned out to be a year of inventory correction which took essentially all year. Imports, however, experienced a merciless decline through the year, battered by the weak dollar, higher prices in many international markets and freight rates that escalated to levels unheard of in the past.
So, 2008 dawned with low inventory, setting the stage for price increases in the US market. And prices have escalated at a rapid pace, with hot rolled sheet rising to nearly $800 per ton for shipments April 1 -- up by $225 per ton since August 2007. According to press reports, the domestic industry believes that prices will continue to increase in the near future. While the US market has been experiencing this surprising run, the rest of the world has not been sitting still. Western European HR prices are over $830 per ton, with China increasing to $604 per ton and the world export price rising to $767 per metric ton according to press reports.
With prices strong in most international markets and the weak dollar, times are still tough for American importers. That said, there is one immutable fact that has to be taken into consideration – domestic producers cannot supply all the steel required by US producers. At least 20% of the US market is dependent on imports and so we are starting to see some import business being concluded at prices higher than domestic. We do not believe that this condition can last for long. In the past when market conditions resulted in imports arriving at prices higher than domestic, the domestic mills quickly raised prices until the normal differential required to do the import business re-appeared. Recent press reports suggest that this trend is just now beginning.
Whether the US economy is destined for a recession is still unknown at this point, but it seems obvious that there is clear sailing for domestic producers through the second quarter at least.
As to all the weak markets we keep hearing about in the US, one report from the Associated General Contractors of America in late February suggests the opposite. They reported that non-residential construction increased in 2007 by 16% over a strong 2006 and they predict that 2008 will have continued but slower growth in the 4-8% range. Clearly, this is not the stuff that recessions are made of. Purchasing Magazine also reported that its manufacturing index stood at over 52 for the month of February. [Any index above 50 reflects an expanding manufacturing sector, below 50, contracting.]
We at AIIS believe that import ordering will slowly improve over the coming months, but the uncertainty of the macro-economic situation makes it impossible for predictions past that.
Now I will turn to the political situation and trade laws.
TRADE LAW BATTLES CONTINUE IN THE US
The American political season is running at full speed now and, as in almost every election in memory, trade is an important issue in the debate. While the Clinton Administration had an admirable record on trade liberalization – NAFTA, the Uruguay Round and support for the accession of China into the WTO – the Democrat Party appears now to be running into the arms of the union supported protectionists. Senators Obama and Clinton seem to be trying to out-do each other with protectionist rhetoric, with the 1993 NAFTA agreement the top target. Ignore for a moment that no economic study I have read has suggested that the NAFTA agreement was anything but a plus for the US, the two remaining Democrat candidates are playing to the fears of union voters who believe that somehow free trade is bad for them. Ironically, a few decades ago, it was the labor unions who promoted free trade, correctly stating that free trade is good for consumers and workers in the US and around the world. In the “olden” days, it was some in the Republican Party that promoted tariffs and trade protection.
Of course, a little healthy cynicism is important to ingest in a political environment like this. The real question is whether either of the Democrat candidates would really try to unravel the globalization of the US economy by disavowing free trade agreements if elected in November? To do so would negatively affect tens of millions of jobs in the US which rely on the international economy to supply intermediate goods to our manufacturing base, not to mention the low priced products that benefit significantly all Americans, but most of all the poor. The voting records of these two candidates while in the Senate suggest that their rhetoric is mostly rhetoric. Their records are not filled with protectionist votes, but some of their votes and their speeches are cause for concern.
On the Republican side, Senator McCain has a clear record of supporting free trade and a history of voting for free trade agreements. His outspoken support of open markets is clear and consistent, even when he has spoken to those parts of the country that are struggling to adjust to the challenges of 21st century globalization.
In the end, every American president since Franklin Roosevelt has supported open markets and free trade at the GATT and then the WTO. While each president has made some overtures to potent protectionist lobby groups, the consistent support of free trade by our presidents gives us reason to believe that regardless of which candidate is elected president in November 2008, support for trade liberalization will continue, at least at some level.
On the trade law front, as is well known, China has taken the position in the US of the favorite target for trade cases by the domestic steel industry. Other countries/regions that have had this distinction in the past include; Europe and Japan, South America, Japan again and Russia. In the case of Japan, the domestic industry and those protectionists/isolationists who made a lot of noise in the late 1980s claimed that the Japanese would buy all of America – after all they had the cash due to the trade surplus they were running – and would hollow out American manufacturing so that Americans would be left “flipping hamburgers” at McDonalds. We all know how that scenario played out.
Notwithstanding what you may hear from others, American manufacturing is not dead or dying. It is often said that the US has lost 3 million manufacturing jobs since 2000 and point to China as the culprit. The problem with this hysteria is that it is long on emotion and has some specific examples but is otherwise short on the facts. It is easy to point to a specific factory that has closed up and moved to China, and there have been some. And it causes all of us concern – after all, importers serve the same customers as the domestic industry. But in the midst of these examples of job losses, we ignore the Russian capital that has created steelmaking jobs in Mississippi, German capital that is creating more steel jobs in Alabama, just to list two. Other companies, European and Japanese, are investing in our south to make more cars, again adding more jobs. And parts suppliers are following, as are engineering firms, raw material suppliers, etc. etc. In the over 200 years of our history, one fact is obvious, the US is a dynamic economy, ever changing and always able to adjust to new conditions. It is doing so now.
So, the death of American manufacturing? Here are the facts.
2.8 million manufacturing jobs were lost during the 2000-2003 recession. [Note that during most of that period, the US steel industry benefited from 201 trade protection.] Did Chinese competition cause that job loss? Since China was a major net importer of steel during this time, that is a hard argument to make for steel. Since 2004, manufacturing job losses have flattened out, totaling some 200,000 during a period of record profits, output and strong increases in worker productivity. Since China became a major exporter of steel in 2005-2006, what about job losses and the health of the manufacturing base? Manufacturing output has been on a proverbial tear setting an all time record for output and profitability in 2006 and of course the American steel industry has benefited mightily too.
For fun, let’s look at US steel industry profits and Chinese imports. When Chinese imports were minimal, the American industry was mired in bankruptcy and losses. When Chinese imports of steel hit their all time high in 2006, along with total imports, the US industry posted its all time record profits. In 2007, Chinese imports declined and the American steel companies’ profitability declined compared to 2006. One could make the argument that maybe we need more Chinese imports, which will generate even more profits? Just a thought.
So, where is the problem? Some say it is the hollowing out of US manufacturing. Well, US manufacturing is not a monolith but taken as whole, it is healthy, with record profits, record exports and even, gasp, record imports of raw materials, intermediate manufactured goods and production equipment. In fact, of total manufactured imports, 55% go to US manufacturers as raw materials, manufacturing inputs and capital equipment. For steel, the tale is similar, with imports of raw materials, slabs, hot rolled sheet, hot rolled bars and production equipment -- the US steel industry itself is clearly dependent on imports.
So, is there a problem? I would say that there is a serious problem with some of steel’s customers. And a – not the -- cause is trade protection. [Other challenges for American manufacturing compared to their foreign competitors include natural gas prices, corporate tax rates, employee benefits, pollution abatement and tort litigation.] If you look at industry data on, for example, the all important transportation, or auto, sector it is one of the weaker manufacturing sectors. It ranked last in profitability during the period 2002-2006, 13th out of 18 in revenue growth, second to last in value added, and last in exports and imports. So, all this talk about steel imports and the steel industry needs to be put in the context of the impact that substantially higher steel prices during this strong period for all manufacturing had on our customers. Would more open trade and fewer import restrictions on steel improve the health of our auto or auto parts customers? The answer is obvious since many of our customers’ costs and profits are highly tied to the price of steel. Yes. Would it solve all their problems? No.
How does our steel industry fare in comparison with the rest of US manufacturing since the bottom of the last recession in 2002? In primary metal manufacturing [the government classification that covers steel] revenues grew 58.7% and ranked second behind petroleum. During this period 2002-2006, profits increased by 666.9% ranking it first ahead of petroleum. Note, STEEL WAS MORE PROFITABLE THAN PETROLEUM! For output, value added, value added per worker, exports and imports, primary metals ranked second behind, you guessed it, petroleum.
CONCLUSION
The US steel market is currently on a proverbial tear and we expect the good times to last at least through the second quarter. We expect imports to improve, but slowly, during the second quarter and arrivals to improve with the normal lag. What we don’t know is whether the stimulus by the government will be successful and keep the US economy from recession that will impact the steel sector more broadly later in the year.
On the trade front, AIIS continues to support the ongoing discussions between our governments on trade and investment. We believe that this is the proper way for trading partners to resolve the challenges facing all of us involved in the international marketplace. Passing clearly WTO illegal and protectionist legislation such as the domestic steel industry is promoting is not the way to solve problems. That was tried in the 1930s and we got world-wide recession. AIIS is also working with US and other allies in our fight to press for common sense reform of America’s protectionist trade laws in the Doha Round.
For the US economy generally, we hope more for a repeat of our experience in 2007, when the first quarter GDP data came out, analysts predicted a recession that year too – and for the same general economic reasons, housing etc. They were wrong as GDP rebounded in the second quarter to 3.8% and the third to 4.9%. While underlying demand in the economy fooled the pundits in 2007, we are hopeful that surging manufactured exports and a still resilient consumer will keep the economy moving forward in 2008.
We will soon know. Thank you for the opportunity to speak to this conference again, and I look forward to any questions you may have.
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