It’s Not All Bad, If You Know Where to Look
By Tim Triplett, Editor-in-Chief
The vehement thumbs-down on this issue’s cover says it all. Findings from the latest Metal Center News Outlook survey show that service center executives are much less optimistic about their prospects for the year ahead than at any other time since MCN began tracking industry sentiment in 1999. For the first time in the past decade, the number of respondents who identified themselves as pessimists nearly equaled the number of optimists, under the study methodology.
Some study highlights (or lowlights): The majority of service centers across the country expect sales and profits to weaken in 2009 by double-digit percentages. Staffing levels are down 15 percent or more compared to last year. Service centers plan to invest 30 to 40 percent less for new capital equipment in 2009.
We all know the bad economic news. We’re bombarded with it every day, from all forms of media, including this month’s MCN. But some positive developments are visible on the horizon.
Consider that the current recession is already more than a year old. The National Bureau of Economic Research has declared that the U.S. economy actually began contracting in December 2007. Since World War II, the duration of economic contractions has averaged just 10 months. Thus we may be much of the way through this down cycle already.
Economic blows don’t bruise everyone equally. While other parts of the economy were floundering, many steel suppliers continued to enjoy strong results, even into the second half of 2008. Perhaps that’s why the current hit feels so unexpectedly cruel. While no one will thrive operating at half capacity for long, the previous five years of industry profitability give many competitors the resources to manage through a weak 2009.
Another saving grace, believe it or not, is the price of steel, which appears to be stabilizing at a respectable level. Though hot-band lost almost half its value in a frightening fourth-quarter swan dive, it has leveled off in the $550 to $600 range. Steelmakers and distributors around the globe have shut down production lines, cut staff, slashed inventories and done what they can to match output to demand. With scrap starting to trend back up, and very little competitively priced foreign product heading for North America, some experts believe steel prices will hold their own in the coming year.
Steel shipments are poised for a rapid rebound as soon as demand picks up and service centers begin to rebuild depleted inventories. There is no slack in the supply chain. MSCI reports that as of November, distributor steel inventories were at their lowest level in nearly 13 years. End-use demand will continue to be a problem through the first half of 2009 as several markets—particularly automotive and housing—remain moribund and the export market flat. But it’s possible the mills have cut production below real demand levels. When buying resumes, the impact will be immediate.
Few other industries stand to benefit more from the impending boost in government spending than steel. If the new administration puts its words into action and funds major infrastructure improvements, along with bailouts for the troubled domestic automakers, the economy—and metals suppliers—may get just the spark they need.
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