Economic mavens suggest that the sky isn’t falling; steel’s another story

The latest from the International Monetary Fund (IMF) has downgraded its world growth forecast for this year to 3.9% from 4.1% issued just a month ago, and projects 2009 growth at 3.7%, down from 3.9%. The fund left unchanged its 2008 forecast for U.S. growth at 1.3%, but shaved its outlook for 2009 growth to 0.7% from 0.8%. It cut its forecast for Eurozone growth the most; expansion this year is expected at 1.4%, down from 1.7%, while 2009 growth is forecast at 0.9%, down from 1.2%.

As observed by our friends at MF Global: “…all in all, a rather uninspiring backdrop for commodities heading into 2009.” And while there does seem a preponderance of negative macro news, more than few are reminding folks to keep it all in perspective: Canaccord Adams, for example, concludes that despite fears of a global economic meltdown, industry fundamentals remain intact. The sky, they maintain, is NOT falling.

Brian S. Wesbury, chief economist, and Robert Stein, senior economist, write to clients of First Trust Advisors that while some economists argue a recession is underway, it is hard to tell from the data. “Yes, the unemployment rate has been rising, but almost all the weakness is coming from housing and high energy prices,” they write. “Other areas of the economy are still doing well and overall economic growth has been positive. What is clear is that strong productivity growth is allowing the U.S. economy to move forward despite headwinds.”

Along the same lines, there was some encouraging news from the housing sector with both July’s new and existing home sales a bit better than expected. So, while problems remain deep and will still be long lasting, it appears that bottoms have been formed assuming, of course, that we’re at an end to the monthly sales declines. Also, new orders for durable goods were up 1.3% in July, adding fresh evidence to those in the “We’re Not in a Recession” camp.

The second quarter revision to gross domestic product (GDP) came out at 3.3% vs. last month’s guess of 1.9%. Real GDP is up 2.2% compared with a year ago. Those less enthused to the latest revision note that virtually all the growth can be attributed to what happened outside the U.S., not in it…the domestic market, they say, remains weak, and coupled with the slowdown in Europe, Japan, and even China, exports cannot be  counted on to propel overall growth in the second half.

Steel may be in oversupply

Through seven months of ‘08, global steel production was reported by the International Iron and Steel Institute (IISI) at 815.1 million metric tons, up 6.1% over comparative 2007 production. That’s a heap ‘o global steel looking to be consumed. China leads with production figured at 308.3 million metric tons, an increase of “only” 9.3%. U.S. production was placed by IISI at 59.4 million metric tons, up 4.8%.

However, as widely reported, overall steel sentiment has sure turned negative in recent weeks with reports of soft buying and September price rollbacks. The reasons cited include: weak demand, higher inventories by users and steel service centers, increasing low priced imports, slower global growth, and the stronger dollar.

Most sources are currently reporting Midwest f.o.b. hot-rolled sheet (HR) in coil at $1,040/short ton, and below, to $1,050, along with reports of August deliveries closer to the $1,000 per ton mark. As noted, September price increases that could have put prices above the $1,100 mark have been rescinded. Purchasing magazine’s Purchasingdata.com is forecasting Midwest f.o.b. HR for September at $1,026 per ton vs. its August average of $1,047.

Global steel prices have been hit even harder with what World Steel Dynamics characterized as a “several month price crash.” Buyers have backed off since July and may continue to do so into October, they say. The firm has its world f.o.b. export price for HRB pegged in a range of $870–$1,000/mt, compared with a July peak of $1,075-$1,115 per ton.

And while clearly weak, WSD sees the domestic market for hot-rolled “holding up quite well” other than the September price cancellations. As for the downside, the global HR market could fall further with the low figured by WSD at $675-$750 range, assuming that the $800 mark is breached. WSD has the current world export price for HR pegged at $1,006/mt.

Scrap is and will be similarly affected by the market softness…as for the domestic market, the latest has the No.1 HMS composite price @ $432.40/gross ton, delivered, down almost $91 from one month earlier, notes Iron Age. Chicago bushelings were place @ $849-$850/ton. Steel Business Briefing, meanwhile, is reporting shredded scrap @ $450, down $150 and bundles/bushelings were placed@ $770, $100 lower.

(Editor’s Note: Purchasingdata.com reported bundles at $475 in Chicago and shredded at $572.)

Going further down the food chain, auto hulks that were fetching $400+ in certain regions (Florida, for example) are now closer to $250…

The early guess for September is for lower ferrous scrap prices but not all processors see the eyeopening lows for shreds and No.1 HMS recently reported by WSD. We’ll all know soon enough but the current trend and sentiment seems pretty clear with respect to finished steel and scrap’s response.

(Editor’s note: Copy was filed last Friday but the editor was vacationing; sorry for the posting delay.)