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4-2010 Toll Processing Conference Report
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Markets Stymied by Uncertainty

By Tim Triplett, Editor-in-Chief

Not much happy news to report from the Fabricators & Manufacturers Association’s Toll Processing Conference last month in Orlando as speakers on the economy, auto, construction and steel markets decried the continued uncertainty on the banking and legislative fronts.

The U.S. government’s economic stimulus has been relatively disappointing for steel, and most other industries, especially compared to China. The Chinese stimulus was much more effective largely because of the autocratic nature of its government, said Dr. Chris Kuehl, FMA economist and managing director of Armada Corporate Intelligence, Kansas City, Kan.

Three factors determine the effectiveness of a government stimulus, he explained. “First, it should be a bit of a surprise, otherwise the market just prices it in.” In the United States, Congress and the Obama administration debated for a couple months how much and where to inject money into the economy. “The Chinese decided to do a stimulus on Friday morning and by Friday afternoon they had one,” joked Kuehl, with only modest exaggeration.

Second, a stimulus must be big enough to actually affect the economy. “The $780 billion sounded like a lot, but we have a $14.3 trillion GDP. That’s not really enough to shift the economy in a different direction.”

Third, he said, a stimulus needs to be targeted. Instead, our democratic government felt the need to spread the money around, much in the form of tax breaks to individuals and funds to be allocated by state and local governments—uses that are not necessarily stimulating to the economy. “We decided to do a stimulus package and make sure everybody got a little bit. We’re not talking about grandparents giving money to their grandchildren here, we’re talking about the economy. We didn’t need to parcel it out equally. A stimulus is supposed to stimulate, and it really didn’t,” Kuehl said.

China’s focus was on creating jobs as only a communist society can. As part of its infrastructure stimulus, it put workers on road construction crews with picks and shovels rather than heavy equipment. “It might have been satisfying for us to put our bankers out there with picks and shovels, but it would not have been very effective,” Kuehl added with a smile.

At a 10 percent growth rate, China’s economy is overheating, experiencing shortages, rising prices and wages, and other inflationary pressures. The government plans to take steps to slow growth by about 2 percent in 2010, Kuehl said. “If they really do cut back by 2 percent, that could mean a significant cutback in consumption of steel in China, which could affect steel prices,” he noted.

China may soon overtake Japan as the second largest economy in the world, but it will have to double in size before it surpasses the United States as the biggest consumer of goods and services. The economic strength of the U.S. is apparent when comparing the per-capita GDP of the two countries, China with about 1.4 billion citizens vs. the United States with 325 million. “It’s advantageous to have lots of money and relatively fewer people. That allows the kind of consumption and growth we’ve seen over the years,” Kuehl said.

Here in the United States, the banks have been chastened, he continued. Many still have significant levels of toxic debt, and more is being added every day with the collapse of the commercial real estate market. The days of “ninja loans” are gone. No more will individuals with no income, no job and no assets be able to borrow large amounts of money. Banks are returning to their old ways of doing business, which is a healthy step, but is also stifling recovery.

“Nothing happens until there is access to money, but the banks are gun-shy. They’ll be acting in a cautious manner until the government makes some decisions on the new banking regulations,” he said.

The inability of Congress to reach a consensus on other issues, such as health care, climate change and jobs, is also stymieing progress. “They’ve put the market on hold. It’s not that the business community is necessarily opposed to all this. We just need them to make a choice, eliminate the uncertainty, so we can adjust to it,” Kuehl said. The outcome of the health care debate, for example, could have a major effect on future construction of hospitals, clinics and other facilities. [Editor’s note: Kuehl’s comments were made prior to March 23 when President Obama signed the new health care bill into law.]

Looking to the year ahead, Kuehl sees continuing high unemployment, in the 8 to 10 percent range. Interest rates should remain low for most of the year as the Fed tries to keep the recovery going. With no pressure from wage growth and limited impact from higher prices, there is little threat of inflation.

Internationally, China may be unable to continue leading the global recovery as it works to cool its overheated growth. Europe’s common market may be heading for a double-dip recession. “The PIIGS (Portugal, Ireland, Italy, Greece and Spain) are in serious debt crises and could drag the EU down,” Kuehl said. Strong commodities demand has sparked growth in nations like Australia, Brazil and Chile, but in general global trade is down and may take years to rebound, he said.

Swiecki:
Prepare to Serve a Smaller Auto Industry

Prospects for the auto industry, and its metals suppliers, are much improved, “but we’re not entirely out of the woods,” reported Bernard Swiecki, industry analyst with the Center for Automotive Research in Ann Arbor, Mich.

“What we really need to grow the automotive market is GDP growth of 3 percent or more sustained for a few quarters. Unfortunately, the forecasts are closer to 2.0 or 2.5 percent for GDP growth. The economic recovery is helping the industry, but not necessarily to the degree we would like,” he told the toll processors at FMA’s conference.

One positive, both GM and Chrysler were able to restructure and emerge from bankruptcy more quickly than many expected. Along with Ford, they have made major strides in reducing fixed costs while improving quality and, with many new products in the pipeline, are becoming more competitive with transplant automakers like Honda and Toyota, he says.

Nevertheless, the market share of the Detroit 3 has dipped below 50 percent, with GM at 19.2 percent, Ford at 15.9 percent and Chrysler at 8.3 percent, a trend unimaginable two decades ago.

Another sign of the times, Ford actually outsold GM in February by a few hundred vehicles. Ford’s recent earnings bested Nissan and Toyota. In fact, February marked a turning point for auto industry sales, as Toyota was the only major automaker in the minus column. Its sales were down 9 percent vs. February 2009, no doubt due to its widely publicized vehicle safety issues.

Recovery of vehicle sales overall is steadily gaining traction. At the low point last January and February, sales were down around 40 percent vs. early 2008. In January 2010, sales of passenger cars were up 13 percent. “In August 2009 the market saw a slight improvement due to Cash for Clunkers. In September, we had a hangover [and sales declined again]. But in the months that followed we were actually in positive territory naturally, without government incentives, so the recovery seems to have actually taken root,” Swiecki said.

For domestic automakers, 2010 is a time to figure out how to make money selling passenger cars, he said. “The days of making money selling trucks, SUVs and minivans while letting passenger cars be loss leaders for CAFÉ [average fuel efficiency] purposes are unsustainable.”

The United States continues its transition to smaller, more fuel-efficient vehicles. Crossovers or CUVs now have the largest market share. Unlike SUVs or sport utility vehicles that are built on truck frames, CUVs are built on car frames. “Right now, the U.S. is about 80 percent a car or car-based market. We are not nearly as truck intensive as we used to be,” Swiecki said. This is a mixed blessing for metals suppliers, however, since it takes less steel and aluminum to produce smaller vehicles. Chrysler’s product line makes it the most dependent on sales of larger vans and SUVs, he added, at least until its new owner, Italian carmaker Fiat, brings new products to the North American market.

In the early part of the decade, auto sales defied the typical up-and-down cycles. The market began to believe that production of 17 million vehicles each year was the new normal. That is until the bubble burst. “Now we realize that was a plateau we may not reach again for another decade,” Swiecki said.

The market plunged to near 10 million units in 2009, and experts disagree significantly on how many vehicles the U.S. will produce in 2010. Forecasts range from 13.3 million down to 11.1 million. CAR’s prediction pegs the market at 12.4 million units. “A few years ago that would have been awful. But considering what happened in 2009, this is decent prosperity. Even if you go with the lower forecasts, new orders will be coming to suppliers from the automakers,” Swiecki said.

Those orders will reflect the shrinking size of domestic car companies, however. The Detroit 3 are scaling the size of their enterprise to match their new market share. GM, Ford and Chrysler will have shut down a total of 55 plants by 2011. Major parts suppliers like Delphi, which also will shutter 27 plants, are following suit. All total, industry employment declined from 1.13 million in 1999 to about 562,000 in November 2009. “In the United States as a whole, we have lost a full half of our automotive jobs. In Michigan, two-thirds of the jobs have disappeared in the last 10 years,” Swiecki said.

But the long-term trends for the U.S. auto industry remain favorable. Metrics like the driving-age population, vehicle miles traveled and number of vehicles per household continue to rise. More cars have been scrapped than sold in the last couple years, creating pent-up demand. “Except in major metropolitan areas, the public transportation system is pretty lousy, so people will remain reliant on cars,” Swiecki said.

Ferch:
Construction to Lag Rest of Recovery

The construction sector was hard hit by the recession and, since it lags the rest of the economy, is likely to struggle for the next several years, said Roger Ferch, president of the Chicago-based American Institute of Steel Construction, who also spoke at FMA’s conference in Orlando.

Had he listened to his mother, it would have been a short speech. “Remember how mom always told you, ‘If you can’t say something nice, don’t say anything at all.’ Well, what I have to say now is just not nice. It’s tough to be positive in this current economy in the construction market,” he said.

Drawing on the well-known movie theme, he noted that the government stimulus is good, though the benefits have fallen short of their promise. The architectural billings index, a precursor of construction starts, is bad because it indicates that few projects are on the drawing board. And the fact that construction spending has not even bottomed out yet is truly ugly.

Construction declined 42 percent from 2008 to 2009 and is forecast to dip another 2 to 3 percent this year. “From the peak in 2006, we are down 55 percent. More than half the market is gone from four years ago,” Ferch said.

In other words, from a peak of 1.75 billion square feet of construction in 2006, the market has declined to a projected 800 million square feet in 2010.

“We know it will start recovering next year, but using a 3 percent GDP growth rate and projecting it out for five years, we’ll only be back to 80 percent of where we were in 2006,” he said.

Similar to automotive, the construction industry is a victim of its own success. During the boom years, it overbuilt. Some projects begun before the bubble burst are now just being completed. Given the excess inventory of unoccupied commercial buildings, and the persistently high unemployment in the United States, it could be years before employers see the need to build new facilities, Ferch said.

“The bubble we had in 2005-07 with more construction than we needed, very similar to the 17 million automobiles that were built each year, was not sustainable. That led to all the vacancies that are out there today. We have now reached a point as low as the early 1990s, which was the last great recession in construction, and we’re still going down,” he added.

AISC does not project growth to start for construction until second-quarter 2011—and that presumes the economy continues to expand. “The recovery is fragile. We need that 3 percent GDP or we will start bouncing along the bottom and we won’t see the growth that we want. Lending institutions are not lending. Until lending comes back, you won’t see construction come back,” he said.

The nonresidential construction sector has seen little direct benefit thus far from the government’s stimulus efforts. “The stimulus money is like bubbles, when you get close to them they pop and disappear,” he said. The original $111 billion earmarked for infrastructure and science projects will eventually bring only about $47 billion for new construction.

The bridge construction piece of the stimulus package is the only one that has had much effect on the market so far. Its $2.5 billion translates into 90,000 tons of new structural steel consumption. To put that in perspective, Ferch said, last year’s 42 percent decline in construction took about 2 million tons of steel out of the market. “So the net impact of the stimulus on the private-public-institutional markets was a loss of 1.9 million tons. It has been devastating. And the worst is ahead because a lot of fabricators and contractors had backlogs they are just now finishing up, and they are desperately trying to find any new work.”

Construction will come back eventually, but those who finance it will require firm pricing and minimal risk. Green trends will have a major effect on construction practices, though there is vagueness to the term that Ferch finds troubling. “My only hope is that over the next few years we can define what green really is,” he noted, pointing for example to those who contend it’s greener to rehab existing buildings than to build new ones with modern, energy-efficient systems.

The steel construction industry is winning in its battle vs. concrete. “Our efforts over the last decade to make structural steel the material of choice have been successful, and we’ve driven our market share up to 57 percent. The second most popular material, concrete, has a share of 25 percent, so we are leading 2:1,” Ferch said.

But the industry is losing vs. a more powerful foe, the political leadership of the U.S. economy, which has so far failed to address the $2.2 trillion in upgrades needed to revitalize America’s infrastructure. “The American Recovery and Reinvestment Act was a political Band-Aid. Congress needs to come up with more long-term solutions,” he said.

Turack:
Slow Growth Forecast for Stainless

While the stainless steel market may experience double-digit growth in 2010 as the economy slowly improves, those gains will be from low levels. Most new projects by the stainless-consuming sectors will be small and most spending will be for maintenance and repair rather than new installations, said Chuck Turack,

Outokumpu’s North American vice president of sales and marketing, in his remarks at FMA’s conference.

“Buying patterns have changed dramatically in the distribution part of the supply chain,” he said. Stainless distributors are buying only what they need and in small quantities. The Metals Service Center Institute reports that service center inventories remain near just 2.5 months of supply following a year when their shipments declined by 25 percent. “January sales were up 5 percent this year over last January—a small percent on a small percent—but any improvement is good at this stage,” Turack added.

Last year’s apparent domestic stainless consumption (mill output minus exports plus imports) of 1.4 million tons was down 25.5 percent from 2008, and off 47 percent from the market high of 2.6 million tons in 2006.

By market segment, Turack said that stainless sheet and strip shipments were down 26 percent last year to below 1 million tons, their lowest level since 1991. Outokumpu forecasts sheet and strip shipments to improve by 20 percent this year. “We are more bullish than others in the stainless industry. We are looking for significant improvement in demand this year,” he said.

Plate shipments declined by 25 percent last year to below 200,000 tons, their lowest level since 1992. Outokumpu forecasts stainless plate shipments to grow by 30 percent in 2010. Likewise, bar shipments declined by 37 percent, to below 150,000 tons last year, but are expected to grow by 8 percent this year.

Most of the market’s switch from high-nickel-bearing 300 series stainless alloys to no-nickel 400 series products has already taken place. The low-nickel duplex alloys, which offer comparable corrosion resistance with higher strength, remain a small growth area.

“What we have seen over the past two years is a flattening of that substitution. We think the big substitution has already occurred and we are probably near where we are going to be in terms of the mix of 300, 400 and duplex alloys,” Turack said.

Stainless steel only represents 2 percent of all metals consumed, but its inherent anticorrosion and aesthetic properties will continue to make it a valuable commodity for the automotive, appliance, food service, chemicals, pharmaceuticals, oil and gas, and process industries. Stainless is a good fit for green, he said. “Our future growth will come from safe and clean vehicles, clean energy, clean water and clean air.”
  
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