Platts Steel Markets North America 2016:
More of the Same

Analysts at the Platts Steel Markets North America conference predicted the major end markets for steel will experience little change in 2016, leading to a year of modest growth for the industry.
 
By Dan Markham, Senior Editor
 
Demand for steel from its primary consuming markets this year will look an awful lot like it did in 2015: automotive will remain robust, construction will show modest growth and the energy market will struggle. Overall, steel demand will increase, but not significantly.

North American apparent steel consumption declined 3.8 percent last year to 140.9 million tons. It is forecast to increase to 143.1 million tons in 2016, but that figure remains below both 2014 and pre-recession levels (see chart), said Steel Manufacturers Association President Phil Bell at last month’s Platts Steel Markets North America conference in Chicago.

Automotive remains the bright spot for steel, though Richard Hilgert believes the market is near its peak. “We’re a little less optimistic about future growth and demand in the U.S. We’ve got demand in North America being flattish in 2016 and 2017, and then tailing off in our financial models,” said Hilgert, senior equity analyst for Morningstar.

The possibility of plateauing growth aside, the economic fundamentals for automotive are almost uniformly strong. Chief among them is a U.S. unemployment figure that continues to improve. The labor market is a leading indicator of the health of the auto industry, as people with more job security buy cars.

New car sales to younger Americans are particularly notable. Real unemployment in that cohort reached as high as 30 percent. “They were still living in mom and dad’s house, and they didn’t have a job. There was no reason to have a car. Once they get a job, they need transportation,” Hilgert noted.

Other positive trends for automotive include strengthening consumer confidence and the cheap price for gasoline, which boosts the miles driven. Combine those factors with an average fleet age that’s still at record highs, and any dip in demand should be short-lived, he said.
 
Also working in automakers’ favor is the strong price of used cars compared with new vehicles. When the price for used vehicles is high, it supports leasing and makes consumers more likely to purchase new due to the value of the warranty on the front end of ownership and resale on the back.

Urbanization is one trend without an upside for the automakers. People choosing to live in metropolitan areas can forego auto ownership to take advantage of public transportation, whether trains, buses or, now, Uber.

The move into the city center has also been a major story in the construction market, said John Cross, vice president of the American Institute for Steel Construction. In 2015, multifamily building was the industry’s success story. A decade ago, construction of residential buildings of five stories or more represented 5 percent of the market. Last year, that figure was 25 percent.
 
“That’s a trend going on across the country,” said Cross, noting that multifamily building represented 70 percent of the market in New York last year. “That’s a major change in demographics.”

While any construction gains are good ones, the steel industry extracts less value from increases in residential construction. Steel has just a 35 percent share of the material usage in residential construction, compared with more than 50 percent in the nonresidential space. Multifamily construction will remain healthy in 2016, said Cross, though he expects the split to move more toward nonresidential this year, improving steel’s share of the overall construction market.
 
The run-up in construction is due to peter out soon. The industry has been in growth mode for about seven years since the downturn, which is typically the extent of any upswing. However, given the depths of the market in 2008-09, and the muted nature of the recovery, construction could squeeze out a few more growth years before the inevitable decline begins, Cross said.

Residential construction is more likely to continue to grow than nonres, Cross said, but the urbanization trend will ensure that residential gains won’t drive much commercial and public spending. “The context has changed. Those multistory residential structures often have office and retail space in them, and that’s not being credited. And single-family housing is not creating new suburban sprawl that brings with it strip malls and schools.”

On the public spending side, congressional passage of the FAST Act, which provides a five-year spending plan, is a good sign for the segment. It should give the states the confidence to launch infrastructure projects since they can now rely on federal backing. But the actual funding levels aren’t that much higher than those in previous continuing resolutions. “There will be an increase, but I wouldn’t call it robust by any stretch of the imagination,” he added. One area of public spending to keep an eye on, he said, is improvement of water utilities—a consequence of the fiasco in Flint, Mich. All in all, Cross predicts structural steel demand will increase by 5-7 percent in 2016, followed by low single-digit growth in 2017, flattening in 2018, and a downturn in 2019.
 
If construction follows that pattern, it would serve as the inverse of the expected course for the energy market, said Nicole Leonard, an energy analyst and project consultant for Bentek.
 
Significant increases in the energy market are unlikely to materialize before the end of the decade. “The North American crude oil market is oversupplied. The natural gas market is oversupplied. And prices are still weak,” she said.

These conditions have put the North American energy industry in survival mode. “In 2016, the U.S. producer is not valued on growth, but on its ability to hunker down and make it through the year,” she said.

Of course, this situation isn’t restricted to North America. Producers all over the world are cutting back on oil and gas production, both because of the low prices and a lack of cash. Eventually, this will ease the oversupply situation. By late 2017-18, demand will begin to outpace supply for the first time in several years, Leonard said. That will lead to the higher prices needed to support future growth. Bentek forecasts the oil price will reach $75 per barrel by the end of the decade.

Beyond that natural cyclicality, global economic growth will be necessary to support a major improvement in the energy markets, and their need for more steel in the ground. Moreover, whatever growth takes place in 2020 and beyond, industry players should not expect a repeat of the flush years from 2010-14. “The shale revolution was a one-time phenomenon,” Leonard said.

Auto, construction and energy make up more than three-quarters of the steel consumption in the United States. Another sector, manufacturing, consumes a smaller piece of the pie, and its recovery has been disappointing, said SMA’s Bell. “Manufacturing growth has actually been a little slower than we thought, and it’s still not back to pre-recession levels.”

To return to 2007-08 levels, manufacturing would need to grow by about 3.4 percent annually for the next three years. Forecasts call for the industry to meet that target in 2016, but not in the following two years. “It’s an environment where steelmakers can survive, but it’s not the level of robustness steelmakers need,” Bell said.

Considering all the factors affecting the domestic steel market, Timna Tanners predicts the hot-rolled coil price will average $435 per ton in 2016—above its current level but below the 2015 average. The hot-rolled price is expected to reach $450 in mid-year.

Further modest growth in the hot-roll price is expected in 2017, added Tanners, the managing director of equity research in metals and mining for Bank of America Merrill Lynch. Her conservative forecast is supported by a number of concerns, including still-low capacity utilization rates, middling demand and a continued threat from imported steel.

On the supply side, Tanners said, some capacity needs to exit the market to support prices. Such a scenario is possible, particularly involving the assets of some struggling integrated producers in North America.

Steel input prices should continue to be low, which works against steel price increases. “We think there will be a lot of scrap. We’ve seen fewer scrap exports, and there is a massive amount of metal content that needs to be scrapped in the energy sector.”

Tanners does not believe recent trade actions will do much to buoy pricing. China is not a large direct exporter of steel to the United States or Europe, so sanctions on them are little more than wrist slaps. “What we can see happening is China shipping more products with steel content, such as appliances, to the United States.”

Wildcards to her forecast include the prospect of a major stimulus effort in China, a dramatic shift in the value of the dollar, a surprising energy rebound or a resurgence in M&A activity.

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Monday, October 23, 2017