SMU Community Chat

AISI's Gill: Economy Needs a “Shot in the Arm,” Literally

Written by Sandy Williams

“A Covid-19 vaccine would be a ‘shot in the arm’ for the economy,” said AISI Chief Economist Tim Gill during Wednesday’s SMU Community Chat Webinar.

2020 has been a challenging year for the steel industry in the U.S. and around the world, said Gill. Capacity utilization rates fell 30 percentage points from mid-March to just over 50 percent in early May. The good news is the situation has improved and capacity utilization was up to 60.4 percent last week.

Steel shipments were down 15 percent year-over-year in the first half of 2020 with a 30 percent drop in April and May. Idled facilities trimmed 11,000 steel industry jobs since February. Ten blast furnaces were temporary idled during the first half and five are now back in operation, Gill reported.

Steel imports have been trending downwards in the past few years, falling from 30 percent to 19 percent of market demand last year. On a monthly basis, imports have begun increasing, exacerbated by continued overcapacity.

The gap between steel production and demand was well over 500 million metric tons last year, almost six times the total U.S. production in 2019. Overcapacity continues to threaten the functioning of global markets as well as the long-term viability of the steel industry in the U.S., said Gill.

The ”crystal ball is cloudier than it has ever been” when it comes to predicting steel demand, said Gill. The economy bottomed out in late April and early May and the question is, how quickly will it climb out of its very deep hole? Because of the rapid changes the pandemic is forcing on the industry and the economy, the length of the recovery will depend on how quickly COVID-19 is brought under control with treatment and vaccines.

“I would say there is consensus that the second half of 2020 will be stronger than most of us thought it would be a couple months ago, but recovery in 2021 and beyond will be slower,” said Gill. The sharp V-shaped recovery that many had hoped for was mostly wishful thinking. It is likely that economic recovery will look like “something between a U and the [Nike] swoosh logo,” he added. Real GDP growth for 2020 is now forecast at down 5 percent instead of down 6 to 8 percent and next year may be up about 3 percent.

Good news is that the auto industry has ramped back up quicker than expected and has been one of the factors behind improved steel shipments and capacity utilization. Construction held up remarkably well during the second quarter with nonresidential construction down only about 2 percent year-over-year. Energy was struggling heading into 2020 and the bottom really fell out in March, said Gill. The sector is expected to remain depressed for the next several quarters. Steel demand will not see a boost in the market at least through the end of next year, he added.

The National Bureau of Economic Research officially declared a recession in June, calculating that it began in March. Gill notes that the economy may already have begun to grow again by time the recession was declared.

He offered some cautious optimism in his concluding remarks. “No doubt it will be a challenging haul for a while, but the worst of it is in the past and we are progressing more quickly toward a wholesome recovery than we thought possible a couple of months ago.”

Latest in SMU Community Chat