n the Midst of a Muddle,
Not the End of the World

What’s the true outlook for the metals market in 2008? It’s hard to stay optimistic given all the doom and gloom about the economy. But down on the frontlines, the view seems surprisingly upbeat.

Fourth-quarter and year-end figures from leading publicly held service centers show most had a very successful 2007. Casual comments from attendees at MSCI’s Carbon Conference last month suggest most got off to a strong start in 2008.

“The economy is not terrible despite what you hear,” said Eli Lustgarten, senior vice president of Longbow Research, and a popular speaker at MSCI events. Forecasting GDP growth around 2 percent, he remains convinced that the odds are in our favor of avoiding a full-fledged recession this year.

“If we have a recession, it’s not going to be due to the cost of money or inventories,” he said, noting that inventory liquidations are the dominant cause of manufacturing recessions. Rather, poor liquidity will be to blame. “Every time you have a recession, money gets tight.”

A recession is certainly possible, he admitted, for a number of reasons: the potential for further declines in housing, record-high energy prices, waning consumer confidence, poor job creation, lackluster corporate profits and slowing growth in other world markets. The financial markets remain extremely nervous from the ongoing effects of the sub-prime crisis. Weak automotive, homebuilding and light construction markets continue to weigh heavily on the industrial sector.

On the plus side, he said, the Fed is swallowing its concerns about inflation and aggressively lowering interest rates. Business surveys show no signs yet of banks failing to extend credit to customers. Consumers remain resilient and have not gone into a recessionary retreat.

In addition, the value of the dollar continues to make American products look very attractive on the global markets. Exports should remain strong as global growth remains robust well into 2008, Lustgarten added.

He predicts housing will likely fall another 20 percent this year, to about 1.06 million starts. Retail sales in the auto sector will dip to about 15.6 million units, from 16.1 million in 2007. Domestic sales of construction equipment will fall about 5 percent as nonresidential construction spending slows. The truck sector looks relatively flat in the first half, but is likely to see a modest upturn in the second half.

Other industrial sectors should do well in 2008, he said. Farm machinery sales should rise 10 to 15 percent this year reflecting the high level of commodity prices. Mining and oilfield machinery demand should also pick up given near-record metal and energy prices. Aerospace demand looks solid, and most electrical equipment markets look promising.

While he described the first part of 2008 as “dicey,” he still expects improving domestic economic growth in the second half of 2008 and beyond. “We’re not in a recession, not in the industrial markets,” he assured his audience of service center executives. “You ought to make a lot of money this year despite the economy. The statistics are all on our side that the world will not end if we can find a way to muddle through.”