Phelps Calls Out Steel Market ‘Contradictions’

Editor’s note: David Phelps, president of the American Institute for International Steel, addressed the 6th International Steel Market & Trade Conference in Beijing, China, last month. A frequent critic of the domestic steel industry and U.S. trade policy, Phelps and AIIS represent foreign steel interests. Following is an edited transcript.

The U.S. steel market and U.S. economy seem to contain a series of contradictions. While the banking crisis has created the environment for a recession that many believe is already here, the domestic steel industry has been raising prices, producing at full capacity and, for some products, putting customers on allocation. Many sectors of the economy are weak— autos, housing and white goods—and if one asks steel executives from mills or service centers, they seem mostly to agree that demand is not all that strong, with some exceptions of course, such as in energy-related markets.

The steel market in 2007 was weaker than in 2006 to be sure, with imports down by 26.6 percent, shipments down by 3.1 percent and the overall market down by 10 percent. However, the steel market was not as weak as the data suggest due to unusually high inventories at the beginning of 2007, which turned out to be a period of inventory correction that took essentially all year. Imports, however, experienced a merciless decline through the year, battered by the weak dollar, higher prices in many international markets and freight rates that escalated to levels unheard of in the past.

So, 2008 dawned with low inventory, setting the stage for price increases in the U.S. market. And prices have escalated at a rapid pace, with hot-rolled sheet rising to nearly $800 per ton for shipments April 1—up by $225 per ton since August 2007. According to press reports, the domestic industry believes that prices will continue to increase in the near future.

While the U.S. market has been experiencing this surprising run, the rest of the world has not been sitting still. Western European hot-rolled prices are over $830 per ton, with China increasing to $604 per ton and the world export price rising to $767 per metric ton.

With prices strong in most international markets and the weak dollar, times are still tough for American importers. That said, there is one immutable fact that has to be taken into consideration: domestic producers cannot supply all the steel required by U.S. manufacturers. At least 20 percent of the U.S. market is dependent on imports, so we are starting to see some import business being concluded at prices higher than domestic. We do not believe that this condition can last for long. In the past when market conditions resulted in imports arriving at prices higher than domestic, the domestic mills quickly raised prices until the normal differential required to do the import business reappeared. Recent press reports suggest that this trend is just now beginning.

Whether the U.S. economy is destined for a recession is still unknown, but it seems obvious that there is clear sailing for domestic producers through the second quarter at least.

As to all the weak markets we keep hearing about in the United States, one report from the Associated General Contractors of America in late February suggests the opposite. They reported that non-residential construction increased in 2007 by 16 percent over a strong 2006, and they predict that 2008 will have continued but slower growth in the 4 to 8 percent range. Clearly, this is not the stuff that recessions are made of.

We at AIIS believe that import ordering will slowly improve over the coming months, but the uncertainty of the macroeconomic situation makes it impossible for predictions past that.

U.S. trade law battles
On the trade law front, China has taken the position in the U.S. of the favorite target for trade cases by the domestic steel industry. Other countries/regions that have had this distinction in the past include Europe and Japan, South America, Japan again and Russia.

In the case of Japan, the domestic industry and those protectionists/isolationists who made a lot of noise in the late 1980s claimed that the Japanese would buy all of America—after all, they had the cash due to the trade surplus they were running—and would hollow out American manufacturing so that Americans would be left “flipping hamburgers” at McDonalds. We all know how that scenario played out.

Notwithstanding what you may hear from others, American manufacturing is not dead or dying. It is often said that the U.S. has lost three million manufacturing jobs since 2000, with many pointing to China as the culprit. The problem with this hysteria is that it is long on emotion and has some specific examples, but is otherwise short on the facts.

It is easy to point to a specific factory that has closed and moved to China, and there have been some. And it causes all of us concern—after all, importers serve the same customers as the domestic industry. But in the midst of these examples of job losses, we ignore the Russian capital that has created steelmaking jobs in Mississippi [SeverCorr] and German capital that is creating more steel jobs in Alabama [ThyssenKrupp], just to list two. Other companies, European and Japanese, are investing in our South to make more cars, again adding more jobs. And parts suppliers are following, as are engineering firms, raw material suppliers, etc. In the over 200 years of our history, one fact is obvious, the U.S. is a dynamic economy, ever-changing and always able to adjust to new conditions. It is doing so now.

So, the death of American manufacturing? Here are the facts. About 2.8 million manufacturing jobs were lost during the 2000-2003 recession. (Note that during most of that period, the U.S. steel industry benefited from Sect. 201 trade protection.) Did Chinese competition cause that job loss? Since China was a major net importer of steel during this time, that is a hard argument to make for steel.

Since 2004, manufacturing job losses have flattened out, totaling some 200,000 during a period of record profits, output and strong increases in worker productivity. Since China became a major exporter of steel in 2005-2006, what about job losses and the health of the manufacturing base? Manufacturing output has been on a proverbial tear, setting an all-time record for output and profitability in 2006. Of course, the American steel industry has benefited mightily, too.

Let’s look at U.S. steel industry profits and Chinese imports. When Chinese imports were minimal, the American industry was mired in bankruptcy and losses. When Chinese imports of steel hit their all-time high in 2006, along with total imports, the U.S. industry posted its all-time record profits. In 2007, Chinese imports declined and the American steel companies’ profitability declined compared to 2006. One could make the argument that maybe we need more Chinese imports, which will generate even more profits? Just a thought.

So, where is the problem? Some say it is the hollowing out of U.S. manufacturing. Well, U.S. manufacturing is not a monolith, but taken as whole it is healthy, with record profits, record exports and even, gasp, record imports of raw materials, intermediate manufactured goods and production equipment.

In fact, of total manufactured imports, 55 percent go to U.S. manufacturers as raw materials, manufacturing inputs and capital equipment. For steel, the tale is similar, with imports of raw materials, slabs, hot-rolled sheet, hot-rolled bars and production equipment. The U.S. steel industry itself is clearly dependent on imports.

So, is there a problem? I would say there is a serious problem with some of steel’s customers. And a—not the—cause is trade protection. (Other challenges for American manufacturing compared to their foreign competitors include natural gas prices, corporate tax rates, employee benefits, pollution abatement and tort litigation.)

If you look at industry data on the all-important auto sector, for example, it is one of the weaker manufacturing sectors. It ranked last in profitability during the period 2002-2006, 13th out of 18 in revenue growth, second to last in value-added, and last in exports and imports. So, all this talk about steel imports and the steel industry needs to be put in the context of the impact that substantially higher steel prices had on some customers. Would more open trade and fewer import restrictions on steel improve the health of our auto or auto parts customers? The answer is obvious since many of our customers’ costs and profits are highly tied to the price of steel. Yes. Would it solve all their problems? No.

How does our steel industry fare in comparison with the rest of U.S. manufacturing since the bottom of the last recession in 2002? In primary metal manufacturing (the government classification that covers steel) revenues grew 58.7 percent and ranked second behind petroleum. During this period 2002-2006, profits increased by 666.9 percent ranking it first ahead of petroleum. Note, steel was more profitable than petroleum! For output, value-added, value-added per worker, exports and imports, primary metals ranked second behind, you guessed it, petroleum.

In summary, the U.S. steel market is currently on a tear and we expect the good times to last at least through the second quarter. We expect imports to improve, but slowly, during the second quarter and arrivals to improve with the normal lag. What we don’t know is whether the stimulus by the government will be successful and keep the U.S. economy from a recession that will impact the steel sector more broadly later in the year.

On the trade front, AIIS continues to support the ongoing discussions between our governments on trade and investment. We believe that this is the proper way for trading partners to resolve the challenges facing all of us involved in the international marketplace.

MSCI
U.S., Canadian Steel Inventories Decline,
Aluminum Dips in U.S.
Steel inventories at service centers in the United States and Canada declined in February, according to the latest Metals Activity Report from the Metals Service Center Institute, Rolling Meadows, Ill. U.S. steel shipments were flat with year-ago volume, while Canadian steel shipments rose 7.1 percent compared with those of February 2007.

U.S. and Canadian aluminum shipments showed no consistent trend, with Canadian shipments rising from extremely low levels, while U.S. shipments declined.

Steel product activity
February shipments of steel products from U.S. service centers were flat, at 4.26 million tons, compared with year-earlier volume, and month-end inventories declined to 12.09 million tons from nearly 12.20 million tons in January. Shipments of nearly 8.8 million tons for the year to date were down 1.4 percent from the year-ago period. U.S. steel inventories at the end of February were 23.3 percent below year-earlier totals and represented a 2.8-month supply.

Canadian steel shipments rose 7.1 percent from February 2007, to 328,400 tons. Canadian steel inventories fell 7.6 percent, to 1.14 million tons, equal to a 3.5-month supply at February shipping rates.

Aluminum product activity
Shipments of aluminum products from U.S. service centers fell 2.8 percent from February 2007 volume, to 93,800 tons. Shipments for the first two months of the year, 192,600 tons, were 4.4 percent lower than a year ago. U.S. aluminum inventories rose slightly from January to 281,200 tons, down 22.5 percent from a year ago and a 3.0-month supply at February shipping rates.

Aluminum product shipments from Canadian service centers rose 4.8 percent in February, to 10,200 tons, and year-to-date shipments of 20,200 tons were 1.7 percent above volume from a year ago. Canadian aluminum inventories of 29,200 tons were 0.4 percent below stocks at the end of February 2007 and represented a 2.9-month supply.

IISI
Growth Rate Slows in World Steel Production
World crude steel production for the 66 countries reporting to the Brussels-based International Iron and Steel Institute was 107 million metric tons in February, a 5.3 percent increase vs. February 2007. However, the moving annual total (MAT) growth rate in February 2008 slowed to 6.2 percent from a peak in March 2007 of 10.8 percent. The world MAT growth rate excluding China slowed from a peak of 6.1 percent in April 2007 to 2.9 percent in February 2008.

China’s steel production totaled 38.9 million metric tons in February, an increase of 7.0 percent vs. February 2007. China’s MAT growth rate slowed from 21.0 percent in February 2007 to 12.1 percent in February 2008. This compares to a MAT growth peak in January 2006 of 26.3 percent.

Among other Asian countries, Japanese production totaled 9.8 million metric tons, an increase of 6.5 percent. India produced 4.6 million tons, an increase of 7.6 percent compared to February 2007.

North America increased steel production to 10.9 million tons, up 5.2 percent vs. February 2007. North America’s MAT growth rate continued to show signs of improvement with five consecutive months of growth, up 2.6 percent in February 2008. The U.S. produced 8.0 million tons in February 2008, an increase of 5.5 percent compared to February 2007.

Total crude steel production in the 27 EU countries in February hit 16.6 million tons, 2.0 percent lower than February 2007. The EU MAT growth rate slowed from a peak of 7.5 percent in February 2007 to -0.1 percent in February 2008. The largest producer in the EU was Germany with 3.8 million tons of crude steel produced, a reduction of 1.3 percent compared to the same month last year.

Production in Turkey was 2.2 million tons, an increase of 14.7 percent compared to February 2007. Russia produced 6.0 million tons, an increase of 5.3 percent compared to the same month in 2007. Production in the Ukraine was 3.5 million tons, an increase of 5.3 percent.

Brazil produced 2.7 million tons of crude steel, an increase of 8.1 percent on February 2007.

SSINA
Specialty Steel Imports, Consumption Decline
January imports of total specialty steel, including stainless steel, alloy tool steel and electrical steel, were 85,583 tons, a 2.8 percent decrease compared to January 2007. U.S. consumption was 213,005 tons, a 19.1 percent decrease, according to the latest figures from the Specialty Steel Industry of North America, Washington, D.C.

Following is data by specialty steel product line:

• Stainless steel sheet/strip: Imports in January were 40,408 tons, a 1.0 percent increase compared to January 2007; U.S. consumption was 118,901 tons, an 18.4 percent decrease.
• Stainless steel plate: Imports in January were 6,471 tons, a 49.5 percent decrease compared to January 2007; U.S. consumption was 15,520 tons, a 57.5 percent decrease.
• Stainless steel bar: Imports in January were 9,050 tons, a 24.1 percent decrease compared to January 2007; U.S. consumption was 18,414 tons, a 24.2 percent decrease.
• Stainless steel rod: Imports in January were 2,311 tons, a 22.3 percent decrease compared to January 2007; U.S. consumption was 5,149 tons, a 24.5 percent decrease.
• Stainless steel wire: Imports in January were 3,367 tons, a 22.5 percent decrease compared to January 2007; U.S. consumption was 6,173 tons, a 19.4 percent decrease.
• Alloy tool steel: Imports in January were 11,187 tons, a 37.7 percent increase compared to January 2007; U.S. consumption and import penetration were not calculable.
• Electrical steel: Imports in January were 12,789 tons, a 62.3 percent increase compared to January 2007; U.S. consumption was 38,679 tons, a 9.1 percent increase from January 2007.

NAM
Manufacturing is Struggling, But Not in Recession
The Federal Reserve Board reports that industrial production declined by 0.5 percent in February, the first decline in four months, reflecting weakness in the housing and auto sectors. The manufacturing sector, which makes up nearly 80 percent of industrial output, fell by a milder 0.3 percent.

“The ongoing housing downturn continues to weigh heavily on a number of manufacturing industries,” says David Huether, chief economist with the National Association of Manufacturers in Washington, D.C. The drop in manufacturing output was led by 3 percent declines in both furniture and wood product production, while motor vehicle production dropped by 1 percent. This is the fifth decline in the past seven months and partly the result of higher energy costs as well as the negative wealth effects stemming from lower home prices, he adds.  

“At the same time, however, other manufacturing industries, such as computers and electronic products, machinery, medical equipment and aerospace, have experienced gains in production in recent months, partly reflecting continued growth in exports,” Huether said. “Thus, while the overall manufacturing sector is not in recession, it is clearly struggling.  With the housing downturn expected to last throughout the year, and the spillover effects into consumer spending likely to intensify, the manufacturing sector will likely experience modest domestic demand in the first half of this year.” 

This will be partly offset by continued robust export growth, Huether concluded. “As a result, the manufacturing sector is in a better position today than it was in 2001 when duel declines in both domestic demand and exports sent the manufacturing sector into a sharp contraction.”

PMA
Lack of Imports ‘Problematic’
Overall U.S. steel imports resumed their downward slide in February, continuing a trend from 2007 that Precision Metalforming Association President William E. Gaskin calls “problematic for industrial steel consumers.”

According to preliminary data issued last month by the U.S. Department of Commerce, overall steel imports decreased 8 percent from 2.41 million metric tons in January to 2.22 million metric tons in February. Imports of hot-rolled steel—the product used most frequently by metalforming companies—rose by 3 percent from January, to 227,543 metric tons in February. Cold-rolled steel imports decreased in February, down 6 percent from January to 122,852 metric tons. Total steel imports for 2008 were 9 percent lower than in the first two months of 2007.

“The drop in steel imports in February is of concern to PMA members,” says Gaskin. “Steel prices remain high and inventory levels remain low. Spot shortages, which we have not seen much of since 2004, have been reported in parts of the country. As long as prices continue to rise and inventories continue to drop, the chances of more shortages will only go up.”

CBSA
Red Metal Shipments Off to a Good Start
Red metal sales have gotten off to a good start this year. Historically, January is the best month of the year for copper and copper alloy service centers. February shipments were also strong, only 6 percent shy of the previous month, reports the Copper and Brass Servicenter Association, Wayne, Pa.

For the three largest volume categories, copper sheet shipments declined less than 3 percent in February vs. the previous month, while 300 series rod and bar increased by 10.7 percent and 200 series brass sheet declined by 11.8 percent.

Total shipments for the first two months of the year were up 1.3 percent, with copper shipments registering a gain of nearly 3.5 percent and total alloy shipments a slight decline.

Briefs
Economic activity in the manufacturing sector failed to grow in March, while the overall economy grew for the 77th consecutive month, according to the March Report on Business from the Institute for Supply Management, Tempe, Ariz. The March PMI of 48.6 percent showed a slight 0.3 percentage point increase when compared to February’s seasonally adjusted reading of 48.3 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates the overall economy is growing and the manufacturing sector is contracting at this time. If the PMI for March is annualized, it corresponds to a 2.4 percent increase in real GDP.

“The manufacturing sector failed to grow in March as the PMI fell below 50 percent for the second consecutive month. This completes the weakest quarterly performance for the U.S. economy since Q2 of 2003,” says Norbert J. Ore, chairman of ISM’s Manufacturing Business Survey Committee. “Manufacturers’ order backlogs continue to erode as the New Orders Index failed to grow for the fourth consecutive month. Additionally, manufacturers continue to experience heavy cost pressures, as the prices they pay are still rising even with slower overall demand. Some manufacturers are still benefiting from strong export demand and continue to see growth in export orders.”

Supply management professionals from across the country have begun a Web-based master’s degree program offered by the University of San Diego and approved by the Institute for Supply Management. Starting in February 2008, the ISM Approved Master of Science in Supply Chain Management is available to supply management professionals currently working in the field. The program is offered online and requires 26 months for completion.

According to the March 2008 Precision Metalforming Association Business Conditions Report, metalforming companies expect business conditions to remain steady during the next three months. Conducted monthly, the report is an economic indicator for manufacturing, sampling 143 metalforming companies in the United States and Canada. When asked what the trend in general economic activity will be over the next three months, metalformers expected little change. Metalforming companies also expected incoming orders to remain virtually unchanged over the next three months.  Current average daily shipping levels remain steady as well.

“Uncertainty over general economic conditions exacerbated by sharp first-quarter cutbacks in housing starts, reduced production volumes for autos and light trucks, and slowing orders for durable goods have impacted many metalforming companies in the first quarter of 2008. This is reflected in their cautious outlook for the next three months,” says William E. Gaskin, PMA president. “However, based on reports from PMA members, the weak dollar is supporting export growth, so domestic manufacturing may be stronger than the U.S. media would have us think.