Steel buyers will see more imports in 2009 but growth still uncertain
By Tom Stundza -- Purchasing, 11/13/2008 2:00:00 AM
Global metalworking activity has weakened, setting the stage for excess steel supply in the months ahead. And if the dollar continues to strengthen, as some analysts suggest, more imports could flow into the U.S., putting further downward pressure on transaction steel prices.
With steel orders slowing worldwide and credit lines reduced, steelmakers in many parts of the world are planning to reduce production to damp supply. Still, it takes time to bank furnaces and reduce processing schedules. So, entering 2009, there still may be enough steel choking the warehouses of service centers, processors and traders to depress market pricing.
Analyst Mark Parr says steelmakers, especially sheet mills, "are living 'hand-to-mouth' and are unwilling to predict when demand will return." The managing director of KeyBanc Capital Markets in Cleveland adds its "unclear how long it takes the recently announced global supply cuts to effectively tighten up the supply/demand balance in the marketplace."
Worldwide, steel purchasing is collapsing under the weight of the U.S. housing recession, credit-market turmoil, high raw materials costs and inflation pressures. In North America, even if steel mills grind to a 25% halt in production by year's end, as forecast by independent analyst Michelle Applebaum, excess stocks still could be evident in January.
The lack of steel buying has coincided with a sharp decline in world steel prices with the North American price collapse occurring faster than anticipated.
"This likely will result in a sharp decline in shipping volumes in the fourth quarter of this year and well into 2009," says analyst Michael Willemse at CIBC World Markets in Toronto. "A significant increase in the U.S. dollar and a sharp decline in global freight rates have further contributed to negative sentiment towards global steel prices," he says.
World steelmaking has expanded by 6% this year through September although reduced output is probable in the fourth quarter as the world steel market "is demonstrating rapidly changing circumstances," according to Ku-Taek Lee, chairman of the World Steel Association and CEO of Posco in South Korea. Although he admits "the market now is in a period of high economic uncertainty," he believes 2008 will be another year of steel demand growth and continues to expect growth in 2009. Economists aren't so sure—but they do agree with the 15–20% reduction in world steel production this quarter.
Analyst Michael Gambardella at J.P. Morgan Securities in New York estimates that planned downtime this quarter at U.S. mills "will cut sheet supply by at least 23%." However, supply could expand in 2009 because of the financial need to run factories at better-than-breakeven operating rates at home and abroad.
Some early analyses suggest that steel demand globally will slide in 2009 after a decade of consecutive annual growth as businesses rethink capital investment projects, consumers curtail purchases of capital goods and businesses back off buys of commercial goods. Upshot: World steel prices could slide by as much as 30% next year while demand drops 20% or more. This could make more steel available to price-shopping buyers in North America.
"It will be interesting to see whether the leaner, meaner, more consolidated global steel industry can discipline output enough to prevent a huge price decline," says Dan Ikenson, an expert on international trade and associate director of the Cato Institute's Center for Trade Policy Studies in Washington. "I don't think a 30% world steel price decline is huge, given where prices have gone the over the past few years." In the U.S., hot-rolled sheet prices in mid-October dropped by 20% from the peak in July and buyers expected further declines ahead.
That's probably because "with all the problems facing the economy, even massive government injections into the banking sector won't be enough to revive the economy right away," says Federal Reserve Board Chairman Ben Bernanke in a recent speech. "A broader economic recovery won't happen quickly because U.S. economic activity had been decelerating even before the recent intensification of the credit crisis."
In fact, economic activity weakened across all dozen Federal Reserve Bank districts, according to the latest periodically published Beige Book report. The gloomy report shows that regions across the U.S. have taken on a more pessimistic view about the economic outlook since manufacturing has slowed and consumer spending has decreased at the same time that U.S. businesses are facing even tighter credit conditions.
In this environment, "it's not been pretty in the U.S. marketplace in recent weeks with demand dead and prices crashing, and it's going to get worse for suppliers," says Bill Sutfin, director of purchasing at steel distribution firm Kelco Metals in Gary, Ind. "There's a lot of steel chasing few orders this quarter, and that's with imports down. When imports perk up next year, supply is really going to expand."
Net imports in the U.S. are expected to be just 18.04 million tons this year, the smallest tonnage since 2003, due to slowed shipments from offshore mills and expanded exports at 13.7 million tons by domestic producers. However, with the world economy expected to be much weaker in 2009 and with the dollar stronger, more foreign steel could make its way to U.S. shores. In fact, Goldman Sachs analyst Sal Tharani's early forecast puts net imports at 23 million tons and exports throttled-down to 9 million tons.
Economists generally endorse the idea of expanded world steel trade Ikenson of the Cato Institute says U.S. manufacturers were able to achieve record exports and slow the loss of jobs—until the latest economic and financial crisis. The analyst suggests that even if exports slide and import increase, past choruses of complaints from unions and domestic mills may be muted by the globalization of the U.S. and Canadian mills.
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