Steel purchasing collapse will continue into 2009
Buying seen dropping 5% after falling 9% in 2008
By Tom Stundza -- Purchasing, 1/7/2009 12:46:00 PM
Purchasing estimates that U.S. steel purchasing will have dropped 9% to 108 million net tons in 2008 when final statistics are tallied. And now, the analysts at Fitch Ratings forecast at least another 5% decline in buying in 2009 to 103 million. That means that production will remain weak and pricing will stay depressed. And, the United Steelworkers union expects 20,000 workers to be furloughed in 2009.
“Continued weakness is expected in the automotive and residential construction segments, with non-residential construction following suit,” write analysts Monica Bonar and Sean Sexton at the New York credit-rating house. In fact, manufacturing in the U.S. Midwest has fallen to its weakest level in almost 12 years as steel, chemicals and plastics, pulp and paper, wood products, non-metallic minerals and regional machinery production all have dropped, the Chicago Federal Reserve Bank reports.
Steel production in the U.S. has been declining since August and is currently at less than 50% of capacity utilization. Output for the industry was up to 2.1 million tons/week at the end of August, the American Iron and Steel Institute reports, but output had fallen to 1.02 million tons/week by the end of December. Overall, U.S. steel production dropped by 6% last year and the Bonar-Sexton report “expects the current sharp contraction in steel demand to continue to weigh on steel production and pricing through the first half of 2009.”
A New York Times report points out that the sharp slide in steel production has several causes. Construction and auto production have fallen sharply; between them, they account for 57% of the steel bought each year in the U.S., citing AISI data. Appliances, machinery and other electrical equipment account for an additional 13%, and the fall-off in production of these goods has also reduced steel orders.
Year-in-review stories by the Associated Press and United Press International point out that orders for steel products began to subside last summer when steel-intensive construction industries in North America weakened and automobile makers reported significantly lower sales and began making smaller motor vehicles with less metal. A strengthening dollar, meanwhile, dampened exports, and the credit crisis intensified, leading steel customers in the key markets of construction, automobiles and industrial equipment to tighten purse strings. “Business froze, credit froze and people stopped buying everything, including steel,” Michelle Applebaum, an industry analyst at MAR Research in Chicago, tells the Associated Press. “You've seen prices for some products down as much as 40%.”
In fact, as calculated by Purchasingdata.com, benchmark hot-rolled steel sheet prices dropped 41% by year’s end from its peak of July--while all carbon and stainless steel pricing dropped by an average 27% from the cyclical peak of last August. Analysts generally believe spot steel prices may bottom out by the end of the first quarter, followed by little cost-push or demand-pull through most of 2009. Purchasingdata.com has forecast hot-rolled sheet averaging $526/ton. Global Insight analyst John Anton has forecast $538. The Fitch Ratings analysts are more bullish with a hot-rolled sheet forecast averaging $630/ton.
U.S. buyers generally source 20%–25% of their steel mill product requirements from foreign suppliers. Imports for the year through October 2008 were off 5% from the same period of last year, but increased in the fourth quarter due to the stronger U.S. dollar and lower freight rates. Upshot: For the year, imports equaled about 23%. In response, domestic steelmakers once again are lobbying against imports, pushing Congress for a “Buy America clause” in an expected federal stimulus bill that will push infrastructure work.
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