If You Squint Real Hard, You Can See the Light
By Tim Triplett, Editor-in-Chief
With a difficult first half of 2009 in the books, Metal Center News set out to gauge the temperament of the service center industry. What we learned from our interviews with service center executives, featured in this month’s cover story, is that conditions remain extremely challenging, but there is light at the end of the tunnel for those, like me, who are willing to squint.
The consensus view boils down to three main points: One, the inventory correction has finally run its course. Two, now that service centers have worked off their excess inventories, they are poised to resume buying again, at least enough to match current demand. Three, current demand still stinks.
“There is still no demand. I don’t see demand picking up anywhere. If you consider that 25 to 30 percent of all steel is consumed by automotive, how can we have a recovery without automotive coming back?” asks Don McNeeley of Chicago Tube & Iron Co.
In fact, some sources see the most potential upside in the downtrodden auto sector as carmaker reorganizations and government stimulus programs (notably cash for clunkers) finally gain some traction. Government stimulus has not yet provided the hoped-for boost in construction spending, however. The outlook is still gloomy for both residential and nonresidential construction.
Considering that demand remains so lackluster, producers and distributors alike are pleased at how well steel prices have held up. Hot-band was approaching $500 a ton in mid-August. Experts attribute this to “mill discipline” and little competition from imports. Steel mills cut capacity below 50 percent early in the year to match production with consumption, and have resisted the temptation—at least so far—to ramp back up and risk driving prices back down.
Surprisingly, there are few signs of a service center shakeout as a result of the market’s malaise. While many companies have downsized and consolidated facilities, relatively few have closed up or sold out. Of course, there aren’t many buyers at the moment. “We’ve all had our confidence decimated. It will be awhile before anyone feels like placing a bet,” notes Gary Stein at Triple-S Steel.
Most economists predict U.S. GDP will finally turn positive again soon. “Steel was six months late getting into the recession, so it will likely be six months late coming out,” predicts McNeeley. “Although we’ve bottomed out, we may not begin to experience the recovery until the end of the second quarter next year.” If you squint hard, you can see the light, but it’s still a ways away.
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