Metals Results Belie
a Slowing Economy

Many experts say U.S. economic growth has peaked and is now on the decline. But second-quarter metals industry results would suggest otherwise, at least in the industrial sector.

The Commerce Department reported late last month that GDP growth had slowed to a 2.5 percent annual rate, substantially below the 3.1 percent rate it has averaged since the recession ended in November 2001. The economy added 113,000 jobs in July, significantly less than the 144,000 forecast, while the unemployment rate rose to 4.8 percent, the first increase since February. At press time, the market was anxiously waiting to see if the Fed would finally cease its campaign of inflation-fighting interest rate hikes.

Nevertheless, among the 10 leading mills included in this month’s MCN second quarter report and outlook (see Mills), sales increased by an average around 20 percent and income by nearly 75 percent, vs. last year’s second quarter. The typical (median) mill saw a 20 percent increase in sales and a 50 percent increase in income.

Likewise, among the seven service center companies in this month’s report (see Service Centers), sales were up an average of 17 percent and income was up 80 percent. Calculated as medians, it was about a 6 percent increase in sales and a 16 percent hike in income for the typical service center.

Though service center steel shipments slowed in June from May’s record pace, they were still up nearly 9 percent compared with June 2005. Through the first half, service centers shipped 29.7 million tons of steel, 6.1 percent more than in the first half of a strong 2005. Similarly, first-half shipments of aluminum products by service centers totaled 632,400 tons, up 5.4 percent from the 2005 first half, according to MSCI figures.

While steel imports into the United States dipped a bit from May to June, imports through the first half still remained 32 percent higher than the comparable period last year. That the U.S. market can absorb these imports without subsequent downward pressure on prices indicates that end-use demand is real and sustainable.

Indeed, leading metals executives forecast stable, or even increasing prices, for the third quarter and beyond. Expressing a common sentiment, Lourenco Gon-calves of Metals USA noted that metals prices rose through the second quarter and stabilized at high levels in late June, where he expects them to stay.

“Many believe that since prices are unusually high, there is an inevitable price decline in the near future. This is not the case, as I believe prices have merely returned to real value. Prices are stable at these levels because domestic supply and demand remain in balance,” he said.

He expressed further confidence about prospects for metals moving forward. “At this point we don’t see any reason for prices to go down. The economy is good, demand is good, the exchange rate has been insulating the U.S. from an avalanche of low-priced imported materials. All things considered, if Mr. [Fed Chief Ben] Bernanke does not screw up with interest rate hikes and slow the economy to a point customers will no longer buy, I can only see prices stable or even higher in the future.”