3-2009 From the Editor
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Prepare Your Organization for a Long, Slow Recovery

By Tim Triplett, Editor-in-Chief
 
Now that they have gotten over the initial shock of the global financial crisis (and their failure to see it coming) leading economists are beginning to formulate opinions about what happens next. While their views vary widely, most agree that recovery will be a long, slow, painful process. Certainly not this year. Probably not next year. Perhaps not even the year after that.

John Anton, director of IHS Global Insight’s Steel Service, was one of three experts who addressed a crowd of concerned steel executives at the SBB Steel Markets North America Conference in Chicago earlier this month. “I see emotions ranging from denial to despair. Denial is not wise, but despair doesn’t help either,” he said. Yet, his outlook was hardly comforting. “2010 is going to be almost as bad a year as 2009. The only good thing you can say about 2010 is that 2009 will be the worst year since the Great Depression.”

During the worst year of the Great Depression, steel demand fell by 58 percent, and it took seven years to recover, noted panelist Howard Booth of Hatch Consulting. Steelmakers today are operating at less than 50 percent of capacity.

Charles Bradford of Bradford Research said the current situation is more comparable to the two-year economic malaise from 1980-82 with its 10 percent unemployment, rather than the 25 percent joblessness of the depression years.

Of most immediate concern to the steel industry are conditions in the construction and consumer durables sectors. Housing starts have fallen to an annual rate around 500,000 homes, down threefold from their peak. Appliance demand has followed suit. Even if homebuilding improves by 20 percent, that would still be only 600,000 units, noted Anton.

“We were building far too many houses; today we are building too few. Eventually there will be a snapback.” It could take until 2012 or 2013, however, for the market to work through the oversupply of existing homes, he said.

Nonresidential construction is an even bigger consumer of steel. With recessionary conditions stifling business investment, commercial and office construction could take years to recover. Highway and bridge maintenance will get a boost from the federal stimulus, possibly even later this year, but the time-consuming engineering and bidding process could push any major new infrastructure projects out to 2011 and beyond, Bradford said.

Steel consumption by the automotive sector may never return to prior levels as production trends away from light trucks and SUVs toward less steel-intensive vehicles. Automakers have cut production of light vehicles in North America by 65 percent. “Cars are going to be smaller, lighter and more fuel-efficient, and use a lot less steel, at least 20 percent per unit, not even taking into account the switch from trucks to cars,” Bradford said.

“This really is a downturn in long-term expectations,” summed up Anton.

Service center executives, you should dial down your expectations, as well. You can’t use the last few years as the basis to forecast the next few, as you have in the past. You need to scale your operation for a three- to five-year recovery.

But take heart. Current economists’ forecasts hold no more weight than the ones promising prosperity just before the recession hit. “I don’t think anybody can make a reasonable forecast today because economic conditions are so uncertain,” Bradford admits. “Consider what you hear to be educated guesses.”

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