October 2017

Steel Summit Report
Beware the Back Half of 2018

While the healthy market of 2017 will stretch into next year, growth will start to lag in the second half in advance of a mild downturn in 2019, said Economist Alan Beaulieu at the Steel Market Update Steel Summit in Atlanta.

By Dan Markham, Senior Editor

The improved business conditions of 2017 will continue, at least for a little while longer, said Dr. Alan Beaulieu, principal at Institute for Trend Research, at the Steel Market Update Steel Summit in Atlanta in late August. “If you have had a good 2017 so far, you’re going to continue to have a good 2017. It’s 2018 when things begin to change, especially in the second half of the year.”

The economist is not anticipating a significant falloff next year. “It’s not that it’s going to be a bad year, just that it won’t be as good as 2017. There will be a shift, and you’ll be more conscious of inventory and more conscious of cash.”

Beyond that, Beaulieu projects a mild macroeconomic recession in 2019, followed by robust times in the early 2020s. He advised the gathered industry executives to view that downturn as an opportunity.

“It will be a good time to spend money on systems and projects that normally take up too much of your time. Look forward to 2019 as an investment period, so you can enjoy the roaring ’20s that follow.”

Beaulieu’s forecast is based on historical leading indicators. ITR’s comparative indices involving industrial production, capacity utilization and new orders all point toward continued strength through at least the first quarter, followed by some softening at some point near midyear.

Though Beaulieu believes that industry participants have more to do with the state of the economy than Washington D.C., there remains some political areas that demand attention. He worries a rollback on immigration could be a problem for the economy, particularly those Northeastern and Midwest states that suffer annual net migration losses to the South and Pacific Northwest. “If Congress clamps down on immigration, local businesses will be shutting down. With immigration, you have a reason to hire.”

Additionally, he doesn’t believe the renegotiation of the NAFTA pact will result in material changes. “At the end of the day, Donald Trump is an international business guy.

He likes to bluster, but he knows that if he gets nasty with Mexico and Canada, they’ll get nasty with us,” he said. “Protectionism has never helped a nation long-term. It keeps out businesses that inject some life into the economy because they’re not welcome.”

To date, that hasn’t been the message. Direct foreign investment in the U.S. has been hovering around $400 billion over the last two-plus years. That has continued a trend that’s been going on for two decades. Net direct foreign investment, money put into the U.S. by foreign entities, compared to investment by U.S. companies outside the country, has been a net positive every year since 1995. “The world is saying the best place to put your money is the U.S. You should have the same philosophy,” he said.

However, he also cautioned against outlandish hope. “When someone says we should be growing at 4 percent a year, you’re talking to someone who doesn’t understand math. Being an $18 trillion economy, it’s hard to grow at 4 percent. Set your expectations to 2.5-3.0 percent, take some risks and understand there’s a lot of growth potential.”

Two Thoughts on China
Veteran steel analysts Timna Tanners and John Anton agree that a surprisingly robust Chinese steel sector contributed to the healthy conditions for the U.S. steel market in 2017. Where they disagree is in how much more of that can be expected.

“China’s demand discipline has been something on the positive side, and a long time coming,” said Bank of America Merrill Lynch’s Tanners, who has been expecting more production discipline from the Chinese since the start of the year. “China has seen some supply discipline that eclipses anything we could talk about in the U.S.”

China’s positive contributions came in two ways. The country has curtailed exports by about 30 million tons in 2017, a byproduct of finally following through on some of its long-touted production cutbacks. “They’re getting serious on safety and the environment. It’s what we’ve been waiting for, and it’s going to be meaningful,” she said.

On top of that, Chinese steel demand defied projections of a 1 percent decline by growing from 1-2 percent this year. “That’s about eight million tons,” she said.

Unlike their Chinese counterparts, Tanners said, the North American production industry is growing. Big River Steel is relatively entrenched in the marketplace, while Acero Junction’s position remains to be seen.

On the demand side, the domestic picture hasn’t changed much. Automotive, the driver of steel consumption over the past decade, has begun to fall off from its highs. Still, Tanners expressed doubts that driverless cars or other potential disruptors are in the offing, and thus auto will remain fairly robust.

The energy market has improved from its recent bottom, but remains a drag. Construction, on the other hand, is growing, with decent gains in housing, consistent if disappointing growth in nonresidential, and potential big increases in public spending.

Taken together, Tanners said, and the bullish case for steel includes hot-rolled coil prices that could reach $700 by the end of the year. “Global prices are strengthening. There’s no way the U.S. doesn’t go along for the ride.”

Following Tanners, Anton, the senior principal economist for IHS Markit, delivered the more pessimistic outlook, founded on an inherent distrust of Chinese discipline. “I’m in show-me mode. China always talks about cutting production. China has cut production before, and then production comes back online and prices go down.”

While he anticipates some softening, both in China and here, he doesn’t expect a crash. And, with the recent storms in the U.S., the current prices could be supported through the end of 2017.

“Harvey takes this off the board,” he said, shortly after the Texas hurricane but before the storms that followed in the Southeast. “U.S. prices probably don’t ease.”
Overall, he sees cold-rolled prices coming down more than hot-rolled, and continued stability in long products.

Analyst, Producer Tangle Over Trade
As is customary, trade considerations were top of mind for many of the participants at the summit. But the discussion extended beyond fair vs. free, antidumping vs. protectionism. Dan Pearson, a senior fellow in trade policy studies for the Libertarian-aligned Cato Institute, had a new take on the subject.

He said trade unfairness is a simple fact of international commerce, having existed since nations began dealing with another. The many unfair practices undertaken by the Chinese are countered by the 400 U.S. countervailing and antidumping measures on an array of products, “which seem very unfair to the people who pay the costs.”

Rather than continue down the path of trying to combat trade violations, since “government is too clumsy to intervene in markets to bring about fair trade,” he advised that the U.S. should simply back away.

Pearson said trade remedies don’t rectify unfairness, but multiply them. In the steel world, he said, the 200-plus orders have served to raise the price of U.S. product well over the global price, to the detriment of steel consumers. “It’s hard to be a successful producer of automobiles or air conditioners if our policies are giving a built-in advantage to overseas producers.”

Ultimately, the problem is in thinking the situation can be made more fair by imposing restrictions. Truly free trade exists independent of what other countries are doing, Pearson said. “If a country is willing to transfer wealth to America by selling its artificially low-priced goods, perhaps it would be best to buy them and just say, ‘Thanks.’”

The following day, Pearson presented that case during a question and answer session featuring Paul Ginter of BTD Manufacturing, Phil Raimondo of Behlen Manufacturing Co., and Barry Zekelman of Zekelman Industries. The two manufacturing company presidents allowed that such an endeavor might work in theory, but were skeptical of its success in practice. Steel producer Zekelman, in contrast, challenged Pearson’s assertions more directly.

“You have countries who pay their workers a dollar an hour. Is that what the U.S. wants to promote? Do we feel morally good about shipping our production and manufacturing over there, instead of holding them accountable to bring those standards of living up, and take care of their workers? Why not shutter our steel mills here and make the steel in China, where you can’t breathe? We want to combat global warming. Global warming is global, it’s not just what’s sitting over Indiana. We have to hold them accountable. The only way to do that is to give them a speeding ticket to slow them down,” Zekelman said.

Moreover, he questioned the idea that the U.S. would get that transfer of wealth under a restriction-free trade structure.

“What’s the true cost? We’re going to buy a cheap product over there, but we’re going to close down his manufacturing facility,” he said, pointing to one of his manufacturing colleagues. “We now need unemployment insurance for his people. He’s not paying taxes. They’re not paying income taxes. The community deteriorates. The property taxes go down. Drugs and crime come in. So make sure the real cost to the consumer is absolutely included. Take that product and tack on all of those costs, and I can guarantee we’re paying a lot more,” he said.

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