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July 2012
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Ruts in the Road Ahead for Steel?

The mood at last month’s Steel Success Strategies conference in New York was fairly downbeat as the steel market faces declining prices and increasing uncertainties.

2012 is developing into a difficult year for steel mills, with macroeconomic developments around the world weighing heavily on steel demand, reported Peter Marcus and Karlis Kirsis, managing partners of World Steel Dynamics, in their remarks June 19 at the Steel Success Strategies conference in New York. WSD co-sponsors the event with American Metal Market.

For the remainder of 2012, Marcus and Kirsis forecast the following:
• Continued low steel mill orders.
• Escalating steel mill production cutbacks.
• A lower hot-rolled band export price, driven down by the strong dollar to perhaps as low as $500 to $575 per ton, from about $615 today.
• Lower prices for steelmakers’ raw materials.
• Reduced mill profits.
• Diminishing steel demand in China due to relatively weak fixed asset investment.

“Folks, we are on the steel price roller coaster. The magnitude of the price decline will be a function of how much of a fall there is in iron ore, coking coal and steel scrap, all of which we think will come down,” Marcus told the crowd of steel industry executives.

Striking a more positive note, he said demand and pricing could spike temporarily in the fourth quarter as service centers and other steel buyers replenish low inventories.
 
Compared to the rest of the world, the United States economy has fared relatively well. It remains largely unscathed by the euro zone sovereign debt crisis. It continues to add jobs, led by a strong manufacturing sector, though unemployment remains disappointing. And the auto industry has rebounded from its near-death experience to become one of the market’s strongest sectors, with sales of 13.7 million vehicles forecast for 2012.

WSD estimates that steel demand in the United States will rise by 6.6 percent to 105 million tons this year, up from 99 million tons in 2011. Offering a bullish forecast for 2013, the analysts predict steel demand will rise another 5 percent to 111 million tons.
 
Forecasting longer term, the two analysts gave equal odds to two very different potential outcomes for the steel market in the next five years—a very fast-paced “open road” scenario and a very bumpy “rutted road” scenario.

Presenting their more optimistic, open road scenario, Marcus and Kirsis described a future in which global GDP grows 3.5 to 4.5 percent per year. There is less fear of financial crises and a euro zone contagion spreading to other parts of the world. The U.S. becomes increasingly energy independent because of the availability of reasonably priced natural gas. Global steel demand grows at a healthy annual rate of about 3 percent. Iron ore, coking coal and steel scrap prices remain at relatively high levels.

Equally plausible is a “rutted road” for steel, Marcus said. “We think that the constraints to global growth will be substantial and that there could well be a U.S. dollar crisis.”

The next four or five years could see lagging fixed asset investment resulting from tight money conditions and higher interest rates. Such construction activity and capital spending account for about 85 percent of global steel demand. China’s growth could slow and become less steel intensive. Far lower iron ore and coking coal prices and depressed scrap prices could drive the price of steel down to unprofitable levels.

Cheaper raw materials would narrow the spread between low-cost and high-cost producers, creating even more price competition. Merger and acquisition activity could accelerate as losing steel companies and raw material suppliers seek to sell out.

“The rutted road scenario to the future is the consequence of substantial economic and political constraints along with the risk of financial crises, which may prevent any sizable expansion of global steel demand in the next half decade,” Marcus said.

World Steel Dynamics is a strong advocate of steel futures trading as a means to ease market volatility, though the concept is opposed by many mill executives. “Mills that help their customers hedge the price risk will gain market share and an improved profit margin, in our opinion. The panacea for the steel mills globally to regain their pricing power is not concentration, it is liquid steel futures,” Marcus said.


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