| November 2005 |
| Economic Outlook 2006 |
| Economic
Outlook 2006: Slowing, But Still Growing |
|
Experts assembled at MSCI’s Forecast 2006 Economic Summit last month shared a general optimism about continued metals demand, though the growth rate may have peaked in 2005. By
Tim Triplett, Sidebars and Tables:
Despite
the expected boost from hurricane reconstruction, demand for industrial
metals could experience some turbulence in the next few years. “In
general, the [global] economic environment is in the process of
slowing,” said Paul Kasriel, senior vice president and director
of economic research with the Northern Trust Co., addressing members
of the Metals Service Center Institute last month in Chicago. The
U.S. economy, which grew at a 4.6 percent pace in the first half
of 2004, slowed to around 3.6 percent in the first half of 2005,
and may well slow further due to the effects of the hurricane disasters
in the Gulf Coast area. “For
some time—we don’t know how long—the American economy
will not be able to grow as rapidly. Katrina took out a lot of our
energy production and distribution abilities, as well as transportation
capacity, which will restrict the economy’s ability to grow,”
said Kasriel. He added that about 25 percent of U.S. crude oil and
natural gas production comes from the Gulf of Mexico. About 10 percent
of U.S. petroleum-refining capacity is in the New Orleans area. Kasriel
noted that the index of leading economic indicators is up only 1.9
percent this year vs. 10 percent last year, indicating that the
pace of economic growth is moderating. “The LEI is moving down,
flashing some warning signals,” he said. “If the Fed continues
to raise rates, I think the LEI will flash those signals even more.”
Housing
and consumer discretionary spending will bear the brunt of the economy’s
slowdown, Kasriel said. Housing is very expensive today, relative
to household income. In fact, housing affordability is at its lowest
level since 1991, which suggests that housing prices could start
declining. Rising
mortgage rates, and a slowdown in housing construction and sales,
could dampen consumer discretionary spending, the main driver of
the economy. “In recent years, a lot of people have been treating
their houses as though they were their own personal ATM machines,”
Kasriel said. “As quickly as the value of the house goes up,
people refinance, take out a bigger mortgage, and use the equity
they extracted to buy a big screen TV or some other toy. Last year
people took over $300 billion out of their houses.” If real
estate values begin to level off, homeowners will be less inclined
to borrow their equity. “So households will have to increase
their net worth in a different way—by spending less than they
earn,” he added. When
past generations retired, they tended to own their homes free and
clear. Today’s “McMansion” owner may still have a
big debt when retirement rolls around. “How are we going to
retire and pay the mortgage? My theory is we will become a nation
of bed and breakfast proprietors, renting out our spare rooms to
Chinese and Indian tourists, and driving them around in our SUVs
showing them this great country of ours,” he said, drawing
laughs from the crowd. “So I think we will see a slowdown in
consumer discretionary spending and a return to old-fashioned thrift
going forward.” One
big plus for economic growth in 2006 will be federal spending on
infrastructure repairs in the South. “President Bush has essentially
written a blank check for the rebuilding of the Gulf Coast,”
he said. Optimistically,
he estimated, the U.S. economy will grow about 3 percent next year,
below the trend rate of 3.5 percent. Meanwhile,
the Fed remains concerned about inflation and is likely to continue
its campaign of regular increases in the short-term rate, now at
3.75 percent. “The Fed is going to raise rates to at least
4 percent and perhaps beyond,” Kasriel predicted. He
ended his remarks with a note of caution, warning that if the Fed
pushes rates too far too fast, it could send the economy into recession
because of the excesses in the housing market and high debt levels
in the consumer sector. Over
60 percent of bank loans are housing related, he noted. “If
something goes wrong with the housing sector, something will go
wrong with the banking sector.” Offering
an international perspective, Joshua Mendelsohn, chief economist
with Mendelsohn Global Economics, predicts global GDP growth should
average from 3.0 to 3.5 percent in 2005 and 2006—down a bit
from 2004’s 4.0 percent, but still reasonably healthy. Growth
around the globe is far from uniform, however. “The pattern
of growth remains unbalanced, with the U.S. and Asia, especially
China, continuing to drive the world economy,” he said. The
effects of the Gulf Coast hurricanes will cause some weakness in
the U.S. economy for the balance of the year, but reconstruction
should give it an offsetting boost in 2006. China’s growth
rate is expected to decelerate next year, but only modestly, to
around 8.5 percent, which means the United States and China will
continue to lead the world market. Reflecting
weakness in Germany, Italy and France, the Eurozone continues to
under perform, with growth this year and next forecast at less than
2 percent. Japan’s economy has shown signs of recovery, “but
in both Japan and the Eurozone, slow and insufficient structural
reforms are contributing to weak growth,” Mendelsohn said. Oil
prices remain the key risk to the world economy, though prices should
recede in the coming months as gulf oil facilities come back on
line. Prices most likely will remain above earlier projections,
however, due to such factors as speculation, concerns over developments
in the Middle East, constrained production capacity and rising exploration
costs. So
far oil prices have had limited effect on global growth, he added.
In real terms, oil prices have not yet reached the peaks of 1980-81,
while the world is much more energy efficient today. Other
unpredictable risks to global economic health include government
protectionism, the potential housing market collapse in the United
States and the ever-growing U.S. current account deficit. CAPITAL
EQUIPMENT Consultants
and senior vice president of Longbow Research, in his presentation
on the capital, agricultural and industrial equipment markets. The
stage is set for a strong industrial market through the end of the
decade, Lustgarten said. While the consumer sector is fading a bit,
heavy industry is on the comeback. “If the steel industry doesn’t
make money in this environment, you should all be ashamed of yourselves,”
he told his audience of mill and service center executives. The
first half of 2005 was “a fooler,” he said, as high steel
and oil prices helped set off a mini inventory correction, prompting
companies to liquidate their stocks rather than purchase high-priced
goods. Oil
prices ought to return to pre-hurricane levels in the next few weeks,
he predicted, though the price of gasoline will remain volatile.
Natural gas promises to be a more prolonged problem. “Higher
oil and gas prices will be a fact of life, though not the end of
the world.” The
lack of capital investment over the past five years, coupled with
positive cash flow from strong sales in 2004, will lead to continued
recovery of capital spending next year, he said. “Capital spending
should continue to strengthen in 2006, with capacity utilization
rates nearing 80 percent. Global markets and U.S. competitiveness
overseas should improve, helped by the weakening dollar. Postponed
purchases and technological enhancements should help spur new investment
in capital goods.” With
3.8 percent growth in the first quarter and 3.3 percent in the second
quarter, “the underlying economy is clearly very healthy,”
he said. Nonfarm payrolls rose by more than a half million jobs
in the summer months, and consumer spending was up 3 percent in
the second quarter, down only a half percent from the first quarter.
“The job numbers aren’t bad, and consumer spending looks
OK.” Polls
show that consumer attitudes have taken a hit due to runaway hurricanes
and gas prices, but consumer spending has not. “Spending patterns
are more resilient than some expect them to be,” Lustgarten
said. “As long as money [lending rates] stays relatively easy,
the economy will keep perking along.” Pointing
to steady job growth, higher average wages and manufacturing productivity
that continues to climb, he emphasized that “ the industrial
sector will participate strongly, if not lead, in economic recovery.” China
is not a threat to this country’s industrial manufacturing
base today, as it consumes most of the capital goods it produces.
“But in five years, it may be a monster. You can see that coming,”
he said. With
U.S. GDP growth in the 3.0 to 3.5 percent range this year and next—below
earlier forecasts due to the hurricane effects—the industrial
sector will slow from double to single digit growth in 2006 as it
approaches the midpoint of the cycle, Lustgarten said. “In
2004, the rising tide lifted all boats. In 2005-2006, that model
will change. The rising tide will leave behind a few losers.” Farm
equipment will be one of them. Reacting to uncertainty on several
levels, farm equipment makers cut production in 2005. Despite drought
conditions in some areas, grain supplies are above normal, putting
pressure on prices. With lower commodity prices, higher fuel costs,
and the possibility funds may be shifted from the 2007 federal farm
bill to help pay for hurricane recovery and the war in Iraq, the
outlook for agriculture spending is guarded, Lustgarten said. On
the other hand, sales of construction equipment are poised to take
off, for a number of reasons, including a robust housing market,
hurricane rebuilding and new federal highway funding. “It
may have seen its best days, but no matter how you slice it, the
housing market is still healthy,” Lustgarten said. In 2004,
nonresidential construction spending finally turned up 3 to 4 percent,
while residential construction remained surprisingly strong at 1.95
million housing starts. The residential sector may decline a bit
in 2005, as interest rates rise, to about 1.85 million starts. Preliminary
2006 residential forecasts of 1.8 million starts still put the market
well above historical averages. Meanwhile, office and commercial
construction could recover another 6 to 8 percent next year. Much
of the spending on new construction equipment, spurred by the $285
billion federal highway bill, has already taken place, Lustgarten
said. Contractors bought a lot of equipment in the last year to
take advantage of tax incentives. “While building of highways
will be stronger, construction equipment won’t increase at
the same rate, since much has already been spent.” He expects
5 to 10 percent growth in 2006, weighted toward medium and heavy
equipment. Pointing
to the “Katrina Effect,” he added that it is unclear how
the rebuilding of the Gulf Coast will proceed. “We shouldn’t
assume that all of New Orleans gets rebuilt in New Orleans. A lot
could take place [on higher ground] from Houston to Galveston.”
Funded by federal dollars, the massive reconstruction effort could
provide a multi-year stimulus to the region. High fuel costs continue to weigh down the profitability of the airlines, but passenger miles have recovered from the effects of the 9/11 terrorist attack. Orders
for new aircraft fell in 2004, but turned around in 2005 and will
recover further in 2006, driven by overseas deliveries. Lustgarten
estimates 5 to 7 percent growth for aviation-related sales in 2005.
“The airlines are all in bankruptcy, but that doesn’t
seem to stop anyone from lending them money.” He
sees continued volatility, but also opportunity, in the petrochemical
industry. “Active petrochemical projects worldwide are well
below where they should be, given the price of energy, due to the
uncertainty and turmoil in the Middle East. We are just not spending
the money on oil and gas that we should. But that should be a good
market for the next four or five years.” The
machine tool industry should see spending increase by 15 to 20 percent
per year for the next few years to compensate for under investment
in that sector, as well. Much
power generation capacity was built in the 1960s through the 1980s.
The issue today is not increasing base load capacities, but getting
the power to the place it’s needed. The latest federal energy
bill addresses this issue, he said. “Transmission expenditures
are going up and ought to look good for the next couple of years.”
Portable generators also will be in high demand for some time. An
“emissions boom” is under way in the truck market. Lustgarten
expects truck sales to jump in 2006 as owners try to reduce the
age of their fleets ahead of stricter federal air quality regulations.
The new 2007 engine emission standards call for added filtration
of exhaust gases. Standards that are even more restrictive are due
in 2010, which will require extensive redesigns of engines and trucks.
Most fleet owners will be looking to upgrade their vehicles before
the end of the decade, when they will have to buy the cleaner, but
considerably more expensive, new technology. The
capital equipment market is at the mid-point of a decade-long boom,
Lustgarten emphasized. “It will not be linear, though. There
will be many inventory corrections along the way.” AUTOMOTIVE
Dennis
DesRosiers of DesRosiers Automotive Consultants Inc. explained that
the pricing environment remains very lean for carmakers in North
America. At the root of this pricing deflation is a consumer who
has come to expect employee-type discounts, and excess auto production
capacity that is getting worse rather than better. “It is very
difficult to close plants in politically sensitive industries like
automotive,” DesRosiers noted. At
the same time, Japanese, German and Korean companies have continued
to bring production capacity to North America, forcing the Big Three
to reposition their capacity for added output. Demand has failed
to increase at the same pace, though ownership of vehicles continues
to grow, and usage is stable despite high gas prices. “Sure
we have a great market, but an awful lot of product is coming in
from offshore,” DesRosiers said. “It will continue like
that for the rest of the decade. China will creep in at some point,
but it won’t be a major influence for this decade.” All
the increase in vehicle production has been on the “New Domestic”
side of the equation, as Toyota, Honda and Nissan continue to steal
market share from Ford, GM and Chrysler. The
Big Three are expected to produce 11,222,738 vehicles in 2005 or
68.1 percent of the market vs. New Domestics at 4,927,457 or a 29.9
percent share. By 2010, the Big Three’s output is projected
to decline to 9,969,548 or 58.8 percent, while the New Domestics’
production will grow to 6,646,365 units or a 39.2 percent share. The
message for suppliers, such as metals producers and distributors:
“Focus on the New Domestics. Any entity over-reliant on GM,
Ford and DaimlerChrylser has a negative adjustment to make,”
DesRosiers said. Although
long-term demand for auto consumption is positive, the market did
not experience a “real” cyclical downturn as expected
at the end of the decade, DesRosiers said, so there is not much
upside potential in the near term. Indeed, there appears to be more
downside threat. He
described two opposing views of the North American auto market’s
near-term future: one gives heavy weight to economic fundamentals
and projects 1 to 3 percent growth over the next few years, to annual
production of over 19 million vehicles. The other gives more weight
to such industry variables as low growth of vehicle ownership, falling
used vehicle prices, escalating operating costs and fewer consumer
incentives. They predict the market will decline by 2 to 3 percent
per year to under 18 million vehicles. “Nobody
is predicting a free fall, most are soft up or down,” DesRosiers
said. Long-term,
vehicle ownership trends are positive. The United States has more
vehicles on the road than people of driving age; Canada has about
70 percent ownership, while Mexico lags at a disappointing 14 percent.
“Mexico doesn’t seem to be developing as we had hoped,”
DesRosiers said. Vehicles
don’t just fill the transportation needs of a healthy U.S.
economy; they fill the psychological desires of an affluent society.
“You could probably meet the fundamental needs for transportation
with 70 to 75 percent ownership,” he added. Product development is moving into a new era, he continued, with automakers dramatically cutting the time it takes to get enticing new designs from the drawing board into production. Historically, automakers have introduced 30-some new models per year. That pace is increasing to 40-some, and is projected to top 60 for the 2007 model year. “This is all very positive for the market and suppliers. When they introduce a new model, the supply contracts are normally opened.” About 1,000 overseas suppliers have relocated to North America, however, restricting the ability of existing players to supply the New Domestics. CONSTRUCTION
The
question is whether the construction sector can outperform the economy
as a whole. “What I’ve been hearing over and over is that
a nonresidential recovery is around the corner. But I’ve been
hearing that for the last three years,” Tanners said. Keys
to watch include how much higher oil prices affect consumer sentiment,
she said, as well as corporate spending. Hurricane damage will slow
economic growth in the South, but that slowdown will be offset to
some degree by better demand for steel during the rebuilding process.
Last
year, automotive production was spurred on by consumer incentives,
while construction lagged. Next year, in a reversal of fortunes,
UBS forecasts zero to 2 percent growth for automotive, while construction
picks up steam. Census
Bureau figures show that nonresidential construction is no longer
deteriorating, though it has leveled out well below year 2000’s
peak. Today the greatest potential for growth is in government spending.
“We’re hoping that private spending can kick in and contribute
more than it has recently,” Tanners said. Two
important indicators for a potential construction recovery are commercial
vacancy rates and capacity utilization. Data show vacancy rates
starting to improve, though it remains to be seen if space availability
is tight enough yet to trigger new construction. Capacity utilization,
which is nearing 80 percent, is an even stronger signal that more
factories may need to be built, she added. Usage
of construction machinery has been on the upswing since 2002, and
really accelerated beginning in 2004, to about 185,000 units in
2005. “The nice thing for the construction machinery industry
is that they are passing on higher prices without much resistance,”
she said. Passage
of the highway bill, which earmarks at least $287 billion in federal
spending, promises to boost construction work even further through
2009. But how much steel will be used is a function of steel pricing,
Tanners said. “If prices remain stable, you can see the consumption
of steel rising. If prices go up, it could stay stable or decline.
But it is bullish for the consumption of rebar, and beams to the
extent they are consumed in highway development.” Tanners characterized her analysis as “guardedly positive” for nonresidential construction, though a slowdown of world growth could cancel out some of the positives for construction spending. While leading indicators suggest GDP is slowing in the face of high fuel costs and interest-rate worries, the hurricane rebuild promises to boost steel demand for at least the next three years, she said. APPLIANCE Taking
a long-term view of the core appliance sector—refrigerators,
ranges, dishwashers and laundry washers and driers—he noted
that appliance shipments have grown at an annual rate of 5.7 percent
since 1997, far outpacing the average for the prior 20 years of
1.7 percent. “When you think of appliances, you think of one
of those old-line manufacturing industries that is relatively mature
with not much happening. But in fact, there has been a fair amount
happening,” Barrington said. He
estimated that 46 million appliances will be shipped this year—nearly
70 million if non-core appliances such as microwaves and air conditioners
are included. Taking
a short-term view, Barrington’s data showed a slowdown in early
2005. “What happened was the first price increase in about
15 years—a price increase (about 3 percent) that actually took,”
he said. Activity has since picked up, with strong shipments in
August. It’s too early to gauge the impact of hurricane recovery,
he added. He
described the four key drivers of appliance demand: new housing
construction, existing home sales, remodeling and appliance replacement.
“If you want to know what’s going on in the appliance
industry, watch what’s happening in the housing industry.”
Barrington
is more optimistic about the continuation of the housing boom than
many other economists. “However, there clearly are some reasons
for concern and some things to watch,” he said. Looking
at housing completions—as opposed to housing starts, because
they correlate better with appliance demand—Barrington projects
a 5 percent increase for 2005, nearing 2 million new housing units.
“Those completions are going to happen because, in most cases,
the starts are already in the ground, moving along quite well.” Before
the hurricanes, Barrington was projecting a slight decline in new
housing, due mostly to the expectation that long-term mortgage rates
would eventually rise as the Fed continues to raise short-term rates.
“Short-term rates have gone up 11 straight times, so I think
we’re going to see long-term rates come up. But if I’m
wrong, and long-term rates stay flat, housing will stay strong that
much longer.” The
effects of the hurricanes on appliance demand will depend on the
response in terms of housing. “Clearly there’s going to
be a lot of building going on in the gulf area. An unbelievably
large number of homes were destroyed. The question is, what’s
the timing on that? If we look at past hurricanes, new construction
really doesn’t kick in until the next year. But the federal
government is more involved today than it has been in prior hurricanes,
so we’re going to have to watch that.” Reconstruction
efforts may be hampered by a lack of materials, Barrington added.
“There are only so many resources out there to build houses,”
including manpower and building materials. “If a lot of construction
starts very quickly on the Gulf Coast, that might just mean less
activity elsewhere, as we’re using a constrained set of resources.” Though
the manufactured housing sector may get a kick-start from hurricane
relief, it has fallen on hard times recently. In the late 1990s,
manufactured housing (mobile homes) accounted for almost 400,000
units a year with well over a million appliances. Today, they provide
half that demand. For
every existing home that changes hands, an average of 1.2 appliances
are replaced. So 7 million home sales per year generate about 8.4
million new appliance sales. Similarly, the increase in remodeling
activity is another growing source of demand for appliances, he
said. Product
designs today make heavy use of stainless steel, though Barrington
said it’s impossible to predict how much longer its popularity
will grow. “Other colors are coming out that may grab some
of the momentum from stainless. I suspect we might be getting close
to the peak on stainless steel.” Front-loading
clothes washers, popularized by Maytag’s Neptune, are selling
for twice the average washing machine price. They appeal to consumers’
environmental sensibilities by using less energy, soap and water.
“I’ve noticed that people want to tell their neighbors
they have one of these Neptune washers. It’s almost like talking
about the new car in your driveway. This is a big change in our
industry. We have more and more features out there that consumers
are buying because they want to be able to tell their friends they
have them.” The
appliance industry is still under tremendous pressure to keep manufacturing
and materials costs down, to meet consumer expectations for low
prices. The market is polarizing, with an increase in shoppers buying
full-featured high-end units, and an increase in those buying economical
low-end units. “Everybody is trying to focus on the high-end,
because that’s where the margin is. But they have to keep the
low-end in mind also, because that’s where the volume is. The
middle is getting squeezed.” Appliance
imports are gaining market share, mostly from Mexico, where domestic
manufacturers have moved production facilities. Asian companies
have been looking to gain a foothold in the North American market,
though with limited success so far. All
total, Barrington forecasts 1 percent growth for appliance shipments
in 2005, on top of 8.3 percent last year. 2006 will see another
modest 1 to 2 percent gain, perhaps more depending on the hurricane
recovery. “In nine of the last 10 years, we’ve set an all-time record in terms of appliance shipments. We should set another record this year. This is still a very strong industry, but with growth not as strong as we’ve seen in previous years.” CARBON
PLATE
Panelists,
including executives from Mittal Steel, Oregon Steel, Jindahl United
Steel, Ipsco Steel and Primary Steel, contributed the following
data on the carbon plate sector. The
top three producers in 1998 had 3.05 million tons of plate capacity
for a 51 percent share of the market. Today, the top three—Mittal,
Nucor and Ipsco—command about 6.0 million tons or more than
80 percent of the market. Industry
data shows that North American plate mill capacity for both cut
plate and plate in coil is 12.45 million tons. Estimated 2005 production
will hit 8.295 million tons, which means the industry is operating
at nearly 67 percent capacity. Among the Big Three, Mittal is operating
at 51 percent capacity, Ipsco at 70 percent and Nucor at 91 percent. U.S.
plate imports in 1998 totaled 2 million tons, but have declined
to around 1 million tons today, a function of a more stable, consolidated
domestic industry, trade cases and the value of the dollar against
foreign currencies, panelists explained. In
the heat-treat segment of the plate market, demand has averaged
about 875,000 tons. The total supply of 1 million tons includes
250,000 tons of imports. Thus, domestic mills are expected to increase
their output of heat-treated product to take advantage of the domestic
shortfall. Overall,
the forecast for apparent plate consumption in 2006 is 6.3 million
tons of domestic shipments, a 5 percent increase over 2005. About
1 million tons of imports will offset 1 million tons of exports
for an apparent supply of 6.3 million tons. The outcome of sunset
reviews on plate-related trade cases could affect future import
levels. The
demand outlook is strong for plate in machinery and construction
equipment, railcars, wind towers, barges and ships, truck/trailer,
OCTG and line pipe, bridge construction, and service centers, the
panelists reported. Worldwide
plate output will increase, with China bringing on 11 million tons
of additional capacity in 2006 and 2007. The question is whether
China will consume all it produces, or become a net exporter of
plate. BAR
PRODUCTS Bar
represented 16 percent, and wire rod another 3 percent, of the 112
million tons of steel produced in the United States in 2004. Bar
shipments totaled 18.5 million tons last year, of which 45 percent
was rebar, 39 percent was hot-rolled, 8 percent was cold-finished
and 8 percent light shapes, according to figures from the American
Iron and Steel Institute. Industry
shipments of all types of steel, including bar, declined by 9.6
percent in the first eight months of 2005, however, while mill capacity
utilization was at 84 percent, down from 93 percent a year ago,
Imports
have become a bigger factor in the bar market this year. The first
half of 2005 saw a 6.4 percent increase in imports of hot-rolled
bar vs. the first half of 2004. Cold-finished bar imports jumped
56 percent in the same period. “There was a tremendous change
in the dynamic of the cold-finished market,” Osterman reported. Acknowledging
how difficult steel’s volatility has been for service centers
and other customers, Osterman said he expects alloy prices to continue
rising, along with energy costs and scrap. “We believe [the
price of] scrap will end up somewhere above where it is right now.
There is a lot of uncertainty in scrap, such as how the supply will
be influenced by the hurricanes.” Though
prices appear on the upswing, Timken remains bullish on demand for
bar in the coming year, Osterman said. Meanwhile,
the steel industry is striving to grow the bar market by working
with mills, customers and universities to develop new steel grades
and processing efficiencies. For example, he said, design engineers
are working to produce bars that are stronger yet lighter and more
machineable for applications such as vehicle crankshafts Michael
Parrish, executive vice president at Nucor Corp., said the trend
in cold-finished bar demand has been relatively flat since 1985.
Nucor places total apparent domestic consumption of cold-finished
bar this year at around 2.0 to 2.2 million tons. The industry’s
capacity to produce cold-finished bar exceeds demand by around 400,000
tons. Despite
the overcapacity situation, the market had high expectations in
early 2005, based on carryover from the strong 2004 and falling
scrap prices. But the market was still working off excess inventory
throughout the supply chain in the first and second quarters, which
moderated consumption. “Inventory is probably in good shape
now,” Parrish noted, adding that demand in most end-use markets
remains generally strong. “Overall, we expect a pretty good
finish to 2005 in the cold-finished business.” Bill
Jones, president and CEO of O’Neal Steel, said both suppliers
and customers unanimously expect positive demand for bar products
in 2006 in most markets. “Capital goods manufacturing, which
is key to bar products, is extremely strong. We don’t see anything
short of a catastrophic event that could change that,” Jones
said. He
ticked off the list of high-demand markets for 2006: railcar, truck
and trailer, barge, shipbuilding, construction and mining equipment,
material handling, energy and military. Growth in automotive and
agricultural machinery will be flat, though at a fairly high level. He
noted the positive effects of federal transportation and energy
bills, as well as federal hurricane relief headed to the South.
“Katrina and Rita will [cause a surge of] federal dollars into
the gulf region at least into the second quarter of next year,”
Jones said. “If past hurricanes are an example, this is to
be followed by a two- to five-year rebuilding program that is positive
for our industry and many others.” Overall,
O’Neal is forecasting slight growth in consumption of bar products,
with adequate availability except for possible shortages of certain
heat-treated alloys. Imports should be available to fill in any
gaps or disruptions in the market, he said. “We are an event-driven
industry, and it’s such events that tend to cause movements
in pricing and availability. Imports of bar products will be there
to address any such events.” STAINLESS
Stainless
imports accounted for over 20 percent of the U.S. sheet and strip
market in 2004, but import penetration should dip to around 17 percent
for 2005 and 2006. “China,
back in 2002, was almost nonexistent. In 2003, they had only about
2 percent of the imports. In 2004, their share was up to 13 percent.
In flat-roll they have become a major importer into the U.S.,”
Blot said. In
the stainless plate market, consumption has declined a bit this
year from 2004’s 300,000 tons. Blot expects some recovery in
2006, though not quite to 2004 levels. Most of the increase will
come from imports. Last year, import penetration in stainless plate
was around 20 percent. This year and next he expects it to range
from 27 to 28 percent. In
the stainless bar and shapes category, consumption peaked in 2000
at over 310,000 tons, declining over the following three years to
around 230,000 tons. Since then, the market has grown steadily and
should approach 300,000 tons again next year, Blot said. The
bar segment has seen big swings in imports, primarily from Italy,
India, Taiwan, France and Germany. Import penetration of bar climbed
from around 35 percent in 2004 to 40 percent this year, and should
decline again to around 30 percent in 2006, he added. “Sheet
and plate are forecast to be down this year, but bar will be up,”
Blot said. “While consumption is down this year, it is not
down as much as mill orders. Right now flat-roll mills are hungry
for orders.” Stainless
supply has been interrupted by changes at the mill level, notably
last year’s closure of Slater Steel’s Atlas holdings in
Canada, Slater’s sale of its Fort Wayne facility to Valbruna,
and the acquisition of J&L Specialty Steel by Allegheny Technologies.
“It
was a four month gap before Allegheny purchased J&L’s operation
and got it running again. Meanwhile, a lot of orders were placed
offshore—not so much because of price but due to concerns over
availability. That added to the increase in inventory, which led
to the current destocking of flat products,” Blot explained. In
addition, North American Stainless has been aggressive about adding
capacity, entering the long products market last year. NAS has been
constrained by the amount of billet it can get from parent company
Acerinox, however, Blot said. “Imports
ordered in fourth quarter last year are still coming in; that’s
why the import penetration numbers in the first half are still very
high. But that will level off as we get to the fourth quarter,”
he added. Pointing
to major end-use markets for stainless, Blot expects double-digit
gains in aerospace this year and next, as well as in power generation.
Growing at more modest rates in 2006 will be petrochemical, construction,
oil and gas, and household goods. Automotive is expected to decline
a bit. Base
pricing of stainless will likely decline in 2006, as the cost of
raw materials moderates, Blot said. “Since nickel is such a
primary element, people often say that as nickel prices go, so do
stainless prices.” Blot forecasts the cost of nickel will decline
from $6.80 a pound this year to an average around $5.00 a pound
next year, due to an increase in global nickel capacity. “North American Stainless continues to add more capacity in both flat and long products. They are here to stay and compete in the market worldwide. That’s going to keep prices down,” he added.
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