The Economy and the Steel Market
Written by: Peter Brebach
I used the dreaded term of Double Dip in my last musings (like in Double Dip Recession), and unfortunately, the chances for such have since increased. As most economists agree, in order to get our economy going, the country needs a job-creation program, and that in turn requires more spending. What we got instead from the geniuses that currently pose as Congressmen and Senators are spending cuts, which will undoubtedly choke off the little flames of recovery we have been nursing for these past two years. Worse, whatever the two sides have agreed to do between now and the next election is not going to work. The so-called super commission is a total waste, with one party already having stated categorically that tax increases are off the table, and that apparently includes closing loopholes for corporate welfare recipients such as Big Oil. And whatever lies beyond that is nothing but utopia cloaked in inter-celestial dust.
The rating agencies had been watching this totally embarrassing process very closely, as they should have, and one of them decided to send a signal to get Congress to understand that neither the debt ceiling nor the creditworthiness of the US are political footballs. Standard + Poor's took the US' credit rating down a notch to AA Plus. To be clear, I am no fan of the folks that gave a triple-A rating to essentially worthless repackaged and restructured mortgages just 3 years ago. It also needs to be mentioned that the two other rating agencies are maintaining their AAA, at least for the time being. However, all this says is that things could have gotten worse (and they might yet), and that in reality, things are pretty bad. But what does all that have to do with the price of eggs (steel) you might ask, so let me tell you.
Few things are tied as closely to economic activity as steel consumption. And while utilization rates appear to be going up (I say "appear" because they are based on capacity numbers that don't include the Thyssen/Krupp output in Alabama), most of the folks I talk to are not singing and dancing. Instead, they are telling me that business has gotten tougher. A quick look at the lead times for Hot Rolled Coil tell the story of very thin domestic mill order books, pretty much across the industry. As a result, the price for hot rolled coils is still on its way down and unless a miracle happens, it will break $ 600.- very soon. The newly lowered credit rating will probably increase everybody's borrowing cost, and between that and the loss of jobs most people expect as the result of the ridiculous debt ceiling agreement, miracles will be very hard to come by.
Usually, when we get to this stage in the game, when the price of hot rolled coil barely covers the conversion cost from scrap, invariably, the subject of idling capacity comes up - shutting down a couple of furnaces. This almost immediately is followed by the question of "who will blink first", and while that's never an easy one to answer, it is even more difficult this time around. There are two new players in the market who do not have to play by the same rules of the game as everybody else, i.e. RG and Thyssen/Krupp, and they produce approx. 7 or 8 million tons between them, which is not peanuts.
RG bought their three mills pretty cheap, and while I suspect the cost of maintenance will haunt them down the road, they probably are the low cost producer for the time being. And I doubt that Thyssen/Krupp will know their accurate production cost until they are running at or close to capacity. I suspect they have a date at which they are expected to reach break-even, but until then, they will have to buy their market share, and the various problems they have been facing are not helpting this process. That puts the onus (of the furnace shutdowns) on US Steel, Mittal, Nucor and SDI, and your guess is as good as mine.
And since I do not believe that the credit downgrade will be sufficient to wake Congress from the deep coma most of its member are in, I do not see a window for a job creation program until after the 2012 election, and then only if the Democrats regain control of both chambers of Congress (remember, this will require new spending). I suspect that by then, the big guys will have taken down some capacity, and as a result of that, prices will have stabilized and quite possibly gone through another volcano / death spiral cycle (thanks, Peter).
Will any of that increase steel consumption? I am afraid not! Automotive and energy have been doing pretty much as well as they can, as have most parts of the manufacturing sector. So, with consumer buying power going down, where is the growth supposed to come from? How about an infra-structure program? Just repairing all the dilapidated bridges (and maybe building a couple of new ones) would give a nice push to the economy and to steel consumption. And could we maybe do something for housing or non-residential? Could we penalize companies that out-source jobs, but reward those who do not or bring them back? Could we stop wasting our money in Iraq or Afghanistan and use it instead to build more kindergardens, schools or water treatment plants in this country? Could we work on making it cheaper to desalinate sea water and then build pipe lines to carry that water to the draught-stricken areas of the country?
I am sorry - I must have been dreaming!