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Where is the U.S. economy heading? It depends on who you ask. 

The second day of February’s FMA Annual Meeting opened on a downer.  But the assembled manufacturers, fabricators and others who descended on Clearwater for three days were at least sent home on a little more upbeat note. 

Kicking off the first full day at the event was Dan North, a senior economist for Allianz Trade. His outlook was decidedly dreary, even if he stopped short of projecting a recession sometime this year. The economist pointed to a host of existing macro factors that all typically portend an economic downturn. 

As with many economists, the most noteworthy topic to North is the actions of the Federal Reserve in response to the rapid inflation that emerged in the post-pandemic landscape. After decades of interest rates bordering on the non-existent, the Fed took numerous steps to curb inflation, once it became clear the phenomenon was not transitory.

The result is a Fed rate not necessarily high by historical standards, but unlike anything that has been seen in more than four decades. 

Though the rate hikes are likely over for the time being, given inflation has dropped back to almost the Fed’s target rate, the effects of the previous increases continue to be felt. North said that rate hikes typically take up to six quarters to fully work their way through the economy, so many of the later increases are still affecting business conditions. 

And they have already had an impact, North said, noting four key areas where the rate increases have been felt – housing, jobs, manufacturing and freight. 

Housing prices began to spike during the height of the shutdowns, and they remain 50 percent above what they were pre-pandemic. Couple the price hikes with the cost of mortgages and housing affordability is at a 38-year low, he said. 

That won’t be fixed quickly. “The 30-year rate is not going to come down really fast. Housing has suffered and will continue to do so,” he said.

Though the overall economy has thus far eluded a recession, that isn’t necessarily true of every sector. “Manufacturing has fallen into recession by the measures I look at,” North said. “New orders for durable goods such as washing machines, appliances, cars, airplanes – the growth is down to 0.1 percent year over year. 

He noted the PMI was in contraction territory throughout 2023 and has remained so to start the year. Additionally, the new orders index remains in contraction as well, which means, “manufacturing has got a little ways to go to recover.”

Related to manufacturing’s struggles is the fate of the transportation sector. “Going back through history, when trucking expenditures fall, it’s followed by a recession. We’re almost at record lows.”

Finally, there’s labor, which has begun to fade, he said. 

Job openings have fallen sharply. That’s reflected in several measures, notably the decline in temporary jobs, a harbinger of worsening economic conditions. 

The same is true for worker sentiment. As part of consumer confidence surveys, individuals are asked about the supply of new jobs, and people now are saying the market is getting tighter. 

“When people say jobs are not so plentiful, it’s followed by a recession,” North said. 

All of this, he said, is partly a byproduct of the Fed’s aggressive moves to curb inflation. 

“Historically, every Fed Reserve always goes a little too far, they keep hiking rates until something breaks,” North said. “It has broken in our business.”

But North’s gloomy take was not shared by the economist who closed the event, Chris Kuehl from Armada Corporate Intelligence. 

Kuehl also addressed the Fed, but thought the organization has been remarkably consistent in its approach, noting more than a year ago that it wasn’t going to begin dropping rates until the third quarter of this year, a move that still looks to be on target. “It will be nice when they come down, but it won’t be all that dramatic,” he said, noting the current rates are not out of the ordinary from a historical perspective. 

Ultimately, Kuehl and the team at Armada Corporate Intelligence were rather unconcerned about the prospects for the rest of 2024. He said they were seeing no signs of recession. Rather he sees the overall economy moving back to about where it stood before the pandemic, sending conference-goers off with a little more spring in their step. 

Old Truths Have Taken a Hit
The last few years of high-peak cycles for hot-rolled coil should cause us to look a little differently at some of the historic generalities governing steel pricing. 

In each of the last four years, HRC pricing has topped $1,000 per ton, at least for some period of time. Before the start of the pandemic, that figure was rarely ever topped, even in strong up markets of the past. 

With those hikes have come some new guiding principles to replace some old truths, noted Michael Fitzgerald, vice president of development, metals, for Argus Media. 

For starters, the days when the hot-rolled coil price and the price of scrap metal were linked appears to be over. In the past, it was assumed the two materials would move relatively in tandem, with a reasonable premium for HRC over one of its chief raw materials. 

But the most recent cycles blew that theory out of the water. The $200 to $300 spread that was common in the past was replaced by premiums in excess of $1,000 when the price hit its highest levels, and a rather routine gap of more than $700. 

“We’re not seeing scrap prices move with the magnitude of steel prices,” Fitzgerald said. 

He attributed this decoupling to a couple of things. First, since Nucor acquired scrap company David J. Joseph more than 15 years ago, North American mills have continued to add raw material holdings to give themselves greater input cost certainty. 

Additionally, while trade cases have kept finished steel goods out of the country, the mills can still go outside for scrap or pig iron when the price for domestic scrap spikes. 

Another example of decoupling, to a lesser extent, is taking place between HRC and cold-rolled and galvanized. The rule of thumb in the past was to expect a $180 to $200 premium for those latter products over hot-rolled. 

However, when the price for HRC has sailed above $1,000, the spread has expanded even further, causing Fitzgerald to believe that market watchers should begin to consider the spread to be more of a percentage, in this case 23 to 24 percent, rather than a hard dollar amount. 

Finally, in prior years, the belief was North America’s capacity utilization needed to exceed 80 percent for a healthy pricing environment. But over the past four years of historically high steel prices, capacity has rarely topped that figure. 

Fitzgerald believes the further movement away from blast furnaces to even more EAF capacity is leading this change. Because the minimills have the ability to dial up or dial down production more rapidly, producers are able to keep a higher lid on pricing drops than in the past. 

“With the blast furnaces, at the end of the day, it was a volume product – the more we make, the more we sell. Now everything that’s been added is EAF capacity. They’re a lot more flexible,” he said. “They can run one caster instead of two or take a shift off. I don’t know if we need to be at 80 percent or above to have a healthy steel industry,” said Fitzgerald. 

As for his forecast for the next few months, Argus had lowered its HRC price to $800 at the end of February. And while he believes there’s a little more room for the price to come off,  he thinks there’s not a lot of upside or downside risk to come through the summer.


[Sidebar:]

Q&A With Steel Executive of the Year

The FMA Annual Meeting kicked off with a one-on-one talk with Worthington Steel’s Geoff Gilmore, who would be honored later that evening with the Steel Executive of the Year Award. Long the province of the Association of Steel Distributors, the honor is now being delivered by its predecessor group, the Association of Metal Processors and Distributors. 

FMA President Ed Youdell cornered the boss of the newly created Worthington Steel on a variety of subjects affecting the steel sector and the overall industrial economy.

Q: Do you have any concerns about U.S. Steel sale to Nippon Steel?
A: I don’t. It’s not unprecedented for foreign mills to have a significant presence in the U.S.  ArcelorMittal would be one of them before Cleveland Cliffs buying their assets.  I have no concerns from that standpoint. I think they’ll continue to be a good supplier and a good customer. Are they going to be very dedicated and mindful to the United States steel industry? Will they continue to invest in the things they need to invest in? I don’t think they’d spend the money if they didn’t. 

Q: You mention Cleveland Cliffs, how do you think that would have turned out?
A: Let me say first, we have a long road yet. I think we’ll get to the finish line, but I think the Steelworkers union is voicing their concerns and we’re in an election year and people are hypersensitive to the politics around it. If Cleveland-Cliffs was to win the bid, this more than likely looks a lot different. They’re a great supplier to us, and they would have continued to be. I think the difficulty if they were to be the acquirer would be antitrust issues. They would have 100 percent control of all integrated assets in the U.S. – tin plate, cold-rolled going into automotive, electrical steels, iron ore. More than likely, if that was to go through, they would have been put in position to sell some of those assets. 

Q: You acquired Tempel Steel a couple of years ago, how’s that been running?
A: It’s exceeded expectations so far. It’s a business we courted for close to a decade. It’s electrical steel laminations, high value-add, a niche-type product. That’s where we like to play. As we look at decarbonization of transportation and moving from ICE to hybrid or wholly electric vehicles, we are going to be a big player in that market. We never thought that would be a straight line growth curve. It’s a significant innovation. It’s a massive value chain that needs to be built out, but we feel strongly it is going in that direction. That’s a market that is going to grow much faster than GDP over the next 10 years.  

Q: What can mills be doing better for their customers to address issues of price volatility?
A: With consolidation, there’s going to be pricing power. They continue to go up very aggressively only to come down even more aggressively. It’s tough for us, and you all, to navigate that kind of environment. Unfortunately, that’s going to be difficult to get away from in the near term. Some of it has to do with a lot of these economic shocks and things out of our control. That’s why we have derivatives. That’s why we don’t speculate. 

Q: If Fed chairman Powell were to walk through the door, what would you share with him?
A: I would applaud him for being cautious about coming off the interest rate hikes too soon. There are undoubtedly significant inflationary pressures; we’ve seen it at home and in our businesses. To have interest rates higher a bit longer, I’d rather be in that position than to be too aggressive coming off and spur more inflation. 
The reality is, I think back when the hikes started, there were probably a fair amount of people in this room who thought a recession was inevitable, it’s coming. It doesn’t appear that’s the case and the landing has been fairly soft to this point. I think we’ve navigated that pretty well. As we approach the summer months, we’d like to see them come off a little bit. That couldn’t be anything but good for manufacturing. 

Q: In the coming year, what are some markets you’re looking for? 
A: I’m excited about automotive in general. Our base business has been up about 8 percent on direct 
shipments on average for the past four years. What’s remarkable about that, is automotive is down 18 percent in the same comparisons. That is our largest market. During COIVD we were down to 12.5 million units. Now we’re close to 15.2, that’s going to continue to increase to 15.5 to 16 to 16.5 over the next two years. 

Q: What are you doing with AI? 
A: We’re very aware of it and several people are watching it closely to educate me on it. It’s moving 
quickly. If you look out 5 to 10 years that’s a long time frame for AI. Ubiquitous comes to mind. It’s going to be involved and around everything we do in this industry. If you’re trying to transform operations, AI is going to be involved . If it’s supply chain, safety, quality, it’s going to be involved. It will be a specific part of all our businesses. Where I want to be prepared is, do you have an employee base that is ready to embrace it? They need to be 
AI literate. 

Q: Over the next 5 to 10 years, what excites you the most? 
A: People talk about the negative things. What keeps me up is my excitement about our company and where we’re going and how that’s going to benefit our people. I feel that way about the whole industry. Look at the infrastructure bill and the spending that’s going to take place. We’re all going to be benefiting from that. Look at what Nippon paid for U.S. Steel. That tells me the industry we’re in is significantly undervalued. That should be exciting to all of us.