Federal stimulus program falls short of boosting plate, beams demand
Steel industry execs don't see much trickle-down demand yet
By Tom Stundza -- Purchasing, 6/18/2009 2:00:00 AM
The money trickling down from the federal stimulus package into infrastructure projects won't be enough to lift demand for plate and structural steels as much as previously expected by some market watchers. That's the word from economists, architects and steel industry executives, who don't see much steel-related infrastructure rebuilding until 2011.
About $110 billion has been allocated in the stimulus package as extra spending on infrastructure projects with $38 billion earmarked in the first wave of road, highway, bridge and infrastructure construction. "Right now, the government is the horse that everybody is betting on because of the stimulus plan to start spending on roads and bridges and other activity that will help push some manufacturing production growth," says economist Charles McMillion at MBG Information Services in Washington.
Annualized first quarter private and public spending on nonresidential construction at $692 million is averaging 3% less than the pre-stimulus $713 million spent in 2008. But, an Associated Press review of $18.9 billion in projects ready to start shows that many struggling communities don't have projects waiting on a shelf because they can't afford the millions of dollars for preparation and plans that are required.
Economist John Anton at IHS Global Insight is projecting steeper spending declines as the year progresses. "Corporate America is backing away from capital spending programs as the recession deepens, final demand falters, the red ink flows freely, credit conditions remain tight and uncertainty abounds," Anton says. The Associated General Contractors of America says the federal fiscal year 2010 budget proposal for construction programs shows a net decrease in federal construction investments of $724 million.
Nucor Corp. CEO Dan DiMicco said at a recent American Iron and Steel Institute press briefing in Phoenix that private and government spending over the next three years won't "put a dent in the $2 trillion needed to get our infrastructure up to date."
John Ferriola, COO at Nucor, tells the Association for Iron and Steel Technology's annual conference in St. Louis, that the $787 billion stimulus package passed by the U.S. government was not nearly enough to spark the kind of manufacturing activity needed to put people back on the job.
The Nucor execs are less optimistic than economist McMillion and estimate that less than $60 billion of the total stimulus package will go into new infrastructure projects. "The planned infrastructure spend is just not enough" to trigger a recession-ending surge in the manufacture of steel and other construction products, says Ferriola.
U.S. demand for plate and structural steel dropped by 15% in 2008 to 13.76 million tons. So far this year, there has been low demand for these steel products or for steel rebar, also used in building projects, which dropped 21% last year to 7.6 million tons. The purchasing outlook for this year is even bleaker: Metal Service Center Institute data for the first quarter shows that purchasing of steel plate from distributors is 38% less than a year ago while buying of structurals is down 35%.
Sales prices for domestic and import carbon steel plate in coil dropped to $602/ton in April, according to Purchasingdata.com, forcing steel mills to reduce rolling schedules. That price is 50% lower than the August 2008 peak, when mills were operating at full capacity and commanding record prices of an average of $1,214.
Since the early May hot-rolled carbon steel plate in coil prices were falling further to around $580, the five-month price average of $704/ton is down from $1,004 for all of 2008 and even lower than the $717 average of 2007. Structural steel prices also have been sliding to $690-$695 range in early May, bringing the five-month average to $795, down from $961 in 2008 and heading toward the $731 average of 2007. Service center buyers see no reason that a May bump-up in shredded scrap prices will boost June wide-flange prices when market demand is comatose. For the past seven months, less than 10% of the buyers of carbon and alloy steel plate polled by Purchasingdata.com have projected price increases.
CRU Group forecasts that North American demand for steel plate will fall by a steep 32% this year--partly because of the slippage in nonresidential construction and partly because of a projected 19.4% decline in production of machinery and equipment. “Many of our large original equipment manufacturers had numerous plant closings and significant reductions in their production schedules during the first quarter of 2009,” says steel plate distributor Olympic Steel of Bedford Heights, Ohio in a recent release. “We expect these market conditions and reduced sales volumes to continue through the second quarter of 2009 and beyond.”
When the government’s stimulus package cleared Congress and money was authorized in early March, a pickup in infrastructure spending and heavy steel purchasing was projected to get going in late 2009 or early 2010. That has been pushed out as far as 2011.
Ken Simonson, chief economist at the Associated General Contractors of America in Arlington, Va., says that declining hotel and office building vacancy rates, difficulties in retail sales and challenges in the credit market all mean it’s not likely that many new offices, hotel or retail projects will start soon.
“In coming months, stimulus money will flow in increasing amounts, but it is not likely to overcome the downturn in private, state and locally funded projects,” says Simonson in a report to AGCA members. “Given the broader economic trends at play, it is likely that nonresidential spending could fall by as much as 9% in 2009, even with stimulus funds.”
Kermit Baker, chief economist of the American Institute of Architects (AIA), also says a national recovery in non-residential construction probably will not get under way until 2011. He cites such obstacles as tight credit, an uncertain outlook for the U.S. economy, which faces soaring deficits, and the prospect of a return of inflation. Architects are seeing more stimulus-driven inquiries for projects but whether that translates into billings remains in doubt, Baker tells a recent Reuters News-sponsored Infrastructure Summit in Washington.
The AIA publishes a closely-watched monthly index of billing activity, which is at 43.7 and likely to mostly remain below 50, the expansion indicator, for the next six to nine months, Baker predicts. Some encouraging signs for construction include evidence that project cancellations have stopped, and costs of materials like steel, copper and lumber, are lower, as are labor costs. Still, credit constraints remain “very serious,” he says, and relatively few stimulus funds are committed to building construction. Instead, stimulus spending is focusing more on repaving streets and highways and upgrading water and sewer projects. Even funding for schools is going to prevent teacher layoffs than new construction or building retrofits, he says.
This isn’t boosting the spirits of such steel executives as Armando Plastino, CEO of Essar Steel Algoma, which has reduced flat-rolled, plate and tubular production at Sault Ste. Marie, Ont., and in early May boosted the number of steel workers to 511 who are on indefinite layoff. In a statement, the exec says weak demand for such steel products as plate is continuing.
Algoma’s major plate markets are boiler and pressure vessels, ship building, railways, heat exchangers, oil and petrochemicals, marine containers, coal and other mining and general machinery and equipment.
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