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Analyst: Steel Demand Won't Regain 2006-07 Levels for Five Years

By Dan Markham, Senior Editor

During John Lichtenstein’s presentation at the Steel Success Strategies conference in New York last month, it was a single comment that attracted the most attention. Giving his steel market outlook, Lichtenstein told the gathering of industry executives, “I believe it will take until 2015 or beyond for the North American steel market to fully recover to the levels achieved in 2006-07.” 

Lichtenstein was part of a five-person panel covering “Steel in the Americas: Managing a Smooth Recovery,” at the 25th annual conference sponsored by American Metal Market and World Steel Dynamics. He sees a distinct difference between the recovery of domestic steelmakers, of which he’s confident, and the recovery of the domestic steel market. He has less faith in the latter.

The bleak view of steel demand provided by Lichtenstein, managing director of the Metals Industry Group for Accenture, is informed by history. The recession of 2008-09 was the worst since the Great Depression, when steel demand plummeted by 65 percent. It took 11 years, and the country’s entry into World War II, for steel demand to recover to the pre-Depression level of 1929. More recently, following the oil crisis-induced recession of the early 1970s, 23 years passed before steel demand in the United States got back to the levels experienced in 1973.

The 1970’s recession bears some similarity to the most recent one in another regard, Lichtenstein said. It was during the 1970s when the initial hollowing out of the country’s manufacturing base took place, which is a condition many fear is being repeated today.

“As is almost always the case, cyclical crises tend to exacerbate long-term structural shifts. When the dust settles, I think we’ll see that the steel intensity per unit of GDP in the U.S. and Canadian economies, which has been declining for years, will have ratcheted down another notch, particularly due to the massive declines in the manufacturing sector,” Lichtenstein said.

Recent employment numbers support his position. Of the eight million jobs lost during the downturn, a full two million were in manufacturing. And considering that manufacturing represents only 11 percent of GDP, “it would appear the manufacturing sector has been disproportionately harmed by the recession.”

At the conclusion of Lichtenstein’s remarks, the other members of the panel, all executives with North American steel mills, were asked if they agreed with his assessment of the daunting duration before steel demand recovers to the levels of three to four years ago. None shared his pessimism.

“I think it will be earlier. I’d suggest 2013,” said Keith Busse, president and CEO of Steel Dynamics Inc., Fort Wayne, Ind. Fellow panelists and CEOs Mario Longhi of Gerdau Ameristeel, Juergen Schachler of ArcelorMittal Dofasco, Canada, and Madhu Vuppuluri of Essar Americas Inc., generally agreed with Busse’s more hopeful timeline.

Convention-attendee Dave Phelps, president of the American Institute for International Steel, spoke up to suggest that one fundamental difference between the current domestic economy and ones of the past is the growing importance of the rest of the world. “Whereas in the ’70s or ’20s our economy depended on our economy, now it’s much more the developing markets that are drawing the world economy back into health,” said Phelps, asking how much net trade of steel might change the current dynamic.

Lichtenstein agreed, noting that production will recover fast than demand because the balance of steel trade will improve over the next three years. But, he cautioned, there are limits to how much this will impact North American steelmakers. “Some people talk about getting to net trade zero. I don’t believe that, but I believe the United States’ net trade position will improve so that steel production will return more quickly than the total market.”

On the other hand, he said, one factor that helped spur demand coming out of previous downturns was government infrastructure spending. But given the current political and budgetary constraints, he is not hopeful about that this time. “The investments are sorely needed, but I’m not sure we’ll have that particular driver contributing to this recovery.”

Though the spending levels of the United States in recent years may make large-scale infrastructure projects unpalatable to some, executives said that bare necessity, rather than politics, may leave this or future administrations with no choice. The combination of increased joblessness and failing bridges and roads will lead to a confrontation, said Longhi. It may not result in the $2 trillion that is needed for a complete and thorough infrastructure overhaul, but it will be substantial. “It’s going to have to be addressed,” he said of the aging infrastructure.

In addition to an improved trade balance, another positive prospect for the U.S. steel market is increased activity in the energy sector, Lichtenstein said, from both conventional and new renewable energy sources. “These prospects are real and need to be vigorously pursued at both industry and company levels, but they are not likely to occur quickly or broadly enough to change the fundamental market situation over the next few years,” he added.

Even if the fundamentals are weak, the industry has options at its disposal to improve them. It starts, he said, with an idea expressed earlier in the day by fellow speaker John Surma, president and CEO of U.S. Steel. During his highlight speech, Surma said the most meaningful issue for everyone in the room is working together to help the federal government develop a strong manufacturing policy.

“The steel industry in a given country is only as strong as its domestic market,” Lichtenstein said. “Global customers focus investment in large and growing markets, not only manufacturing but research and development. The ability of a producer to collaborate directly with customers in the development of new products is essential in keeping an industry at the leading edge technologically. Without this, its products become increasingly commoditized, threatening the sustainability of exports, as well as increasing the likelihood of imports of advanced products made elsewhere.”

  
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Thursday, November 27, 2014