Community Chat Follow-up: Q&A with IHS Markit’s John Anton

Written by Tim Triplett

Yesterday’s SMU Community Chat drew nearly 500 attendees to hear John Anton, associate director of the IHS Markit Pricing and Purchasing Service, give his analysis of the coronavirus pandemic’s impact on the U.S. economy and steel market. His presentation prompted nearly two dozen questions from listeners, too many to cover during the Q&A portion of the webinar. Below are his short responses to some of those unanswered queries:

Q: Any additional detail on auto and construction demand?

A: Auto declined by 40 percent from Q4 2019 through Q2 2020, seasonally adjusted. IHS Markit forecasts 8 percent growth for automotive in 2021 and 6 percent in 2022. That will still leave the industry at only 80 percent of its 2019 output.

Construction declined by 18 percent during the same period and will be down 27 percent by the time it bottoms in the fourth quarter. The forecast is for no real upturn in construction until 2022.

Q: How many months before consumer demand returns given that U.S. states are reopening now?

A: Think quarters or years for full demand, not months. Waiters, restaurant owners, car salesmen and women, theater workers and owners. These people lost business and there really isn’t pent-up demand. If I get a haircut every three weeks, I won’t get it cut every 1.5 weeks once barber shops are open. Moreover, energy is a huge sector, and the fear of job loss will mean this group of employees will be very cautious. More than 70 percent of the economy is in services, normally a buffer against recession. But in this case, it was the sector hit hardest and recovery simply will not come quickly.

Q: What’s your view on steelmaking capacity permanently shutting? Can enough capacity capitulate to offset new supply (aka Steelmageddon!)?

A: Can it? Absolutely! Will it? Well, that remains to be seen. It is a hard sell to a BF mill owner that shutting down now would be a really nice thing to do for the EAF mill that is pushing them to the brink.

Q: When do you expect recoveries in oil prices, supply and demand so drilling can continue and demand for OCTG can get back to healthy levels again?

A: We see about $50/bbl by the end of 2022, with several scenarios that take into account V-shaped, U-shaped (our baseline) and W-shaped recovery. In all of them, O&G activity is curtailed. Part of the reason is that tight oil companies were highly leveraged, so there will be lasting damage in 2020 that has ramifications for an extended time. Remember, things were a bit hairy in late 2019, then the sledgehammer hit.

Q: How much is non-fossil-based energy (wind, solar, etc.) contributing to the slow and meager recovery of oil and gas?

A: Renewables are a far bigger issue for coal than for O&G. For petroleum, the issue is lower demand from transportation, which is not so much a renewables area, at least for the next few years.

Q: How do you justify scrap prices staying low if additional EAF capacity is coming online in 2021?

A: EAF capacity will come online, but not in a rush. Scrap prices were already around $225 before COVID-19. We see this as a new normal, but expect prices to actually fluctuate between $200 and $250.

Q: What about QE (quantitative easing) by the government? Inflation risk from the stimulus dollars?

A: Without QE, the bottom would have dropped out. So, it was a good thing. But it will not come without cost. The country screamed in 2008 at $700 billion, now we are throwing out $2 trillion, $3 trillion, and not blinking. Someday that has to be repaid. It is a major reason many of those graphs would have looked weak if I had extended my discussion to 2030. Money that pays back the stimulus is money that does not buy steel-consuming goods.

Q: What’s the probability of an infrastructure bill getting funded in 2020?

A: It’s growing lower each day, I fear. Dems and the GOP are transitioning from cooperation to partisanship. This is one of the rare times it is not just to be mean to the enemy, but because they see very different solutions going forward. This is actually legitimate debate. Refreshing, but probably won’t last long. But the practical upshot for an infrastructure bill is that it is getting hard. If we stack the money already spent, and the growing nervousness about the future implications, then finding money for infrastructure may have a hard time. It is not dead, but it not going to be easy.

Q: What impact will this downturn have on announced or in-process steel mill construction or expansions going forward?

A: I can only say that so far it has only tapped the brakes on a couple of projects. So far nothing has been taken off the table. In my opinion, as long as their financing holds up, I think the expansions will go forward.

Q: We have seen many analysts predict a “V-shaped recovery.” Is that no longer the case?

A: IHS Markit has not been a V proponent from the moment COVID-19 spread out of China and into the world. At best we see a long U, at worst we see a W (restart quickly then virus returns with a vengeance).

Q: What’s the effect on automobile purchases by car rental companies?

A: It will probably be very bad, but then all automobiles will be bad for 2020. Hertz is preparing to declare bankruptcy. Corporate travel will return slowly and very probably only partially. Assume almost zero revenue for the second half of March, all of April and May, and very low revenue for the remainder of 2020. And since Hertz is near bankruptcy, what kind of financing terms should we expect for the others?

Q: What about the ag industry and food supply?

A: Ag should remain strong. One thing proven is that people can go without a haircut, but they cannot go without food.

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