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Steel May Feel Minimal Recession Fallout
PITTSBURGH -- Global and U.S. financial markets might be unraveling, but many steel industry observers insist that the fallout won't hurt North American steelmakers as much as previous economic downturns.

There is concern about a recession in the United States, but most steelmakers have stronger balance sheets now than they did in past industrial recessions, analysts said, and the global nature of steel markets should hedge against any steep domestic downturn. In the United States, the fundamentals of low imports, a weak dollar and low customer inventories should keep the industry healthy and margins strong through 2008, they said.

But others argue that the global economy shows signs of weakening, which revives concerns about potential overcapacity and dumping from China and other nations. And it also remains unclear whether recently announced price increases will hold in the United States as end-use markets deteriorate, they said.

Even if a U.S. recession were to occur, it would not necessarily hurt global steel demand, according to Timna Tanners, an analyst with UBS AG. That's especially true in emerging markets such as Brazil, China, India and Russia, where demand for steel for infrastructure projects remains strong. Steel demand also remains firm in the Middle East, where economies continue to thrive on the back of high oil prices, she said.

But the steep stock sell-offs in the United States and around the world in recent days could spook some steel buyers who are already nervous about making purchases in a sluggish economy, Tanners said.

The Dow Jones industrial average fell 465 points in early trading Tuesday, but ended the day down a relatively more modest 128 points after the U.S. Federal Reserve Board announced an emergency rate cut of three-quarters of a percentage point. The deep cut, the largest single Fed move in 23 years, appeared to soothe the equities markets.

Shares of U.S. Steel Corp., Pittsburgh, ended Tuesday at $101.96, down 2.6 percent from their previous close at $104.72, and ArcelorMittal SA, Luxembourg, saw its American depository receipts dip to $60.65, down 3.2 percent from a previous close at $62.70. Nucor Corp. bucked the trend, rising 1.9 percent to $52.18 per share from a previous close at $51.22.

"It makes everyone nervous," Tanners said. "I just don't know that it changes the fact that steel prices are rising and global conditions are strong."

"Our watchful and diligent eyes have yet to detect any storm cloud on the horizon," joked Mark Parr, a steel industry analyst with KeyBanc Capital Markets, Cleveland. "Anything is subject to change, but the momentum remains very encouraging."

A.K. Steel Corp., West Chester, Ohio, posted records results for 2007 and expects a good year in 2008 even with its exposure to the Big Three U.S. automakers, Parr said. And with global shortages of raw materials, the bull market for basic materials looks set to continue.

With domestic supply limited by low imports and the weak dollar, disciplined and consolidated mills are in a "very opportunistic environment" and should be able to expand their margins, Parr said.

"It's a matter of fear vs. fundamentals, and the fundamentals haven't deteriorated very much," independent analyst Nicholas Tolerico, Charlotte, N.C., said. "I think the markets will be laughing about this in six months."

While the U.S. economy has weakened, there hasn't yet been evidence of the steep layoffs that would accompany a truly dire economic downturn, Tolerico said, and increased prices should make for a good 2008 for U.S. mills.

But not everyone is entirely optimistic. The outlook for metal industries in general remains strong, according to John Tumazos, founder of John Tumazos Very Independent Research LLC, Holmdel, N.J. Companies such as U.S. Steel and Nucor could even use the market downturn as an opportunity to buy back shares at bargain prices.

With inventories low, the near-term outlook for the steel industry is good, he said, but the longer-term picture is a bit murkier, especially with automotive and construction markets struggling. "It's hard to believe that the steel price hikes will hold in the second half of the year when end markets are poor," Tumazos said.

Freight rates are falling, according to Charles Bradford, founder of Bradford Research Inc., New York, particularly between China and Brazil and China and Australia. "The question people have to answer is why?" he said. "Normally, freight rates only fall like this if there is an economic problem."

Most don't expect steel demand to improve much in 2008, Bradford said, and imports could increase, especially if markets in Europe and elsewhere tail off at the same time that U.S. mills push for increased prices.

Many argue that consumer and government spending around the world will compensate for reduced consumption in the United States, according to Scott Burns, an equity analyst with Morningstar Inc., Chicago. But the U.S. consumer still spends roughly nine times as much as the Chinese consumer, he noted, and Chinese manufacturers will likely be hurt if U.S. industries and shoppers buy less of the parts and products China makes.

"Will China be able to delink from the U.S.? That's the question I would ask if I had a crystal ball," he said.

The Chinese middle class continues to expand, and the government has plenty of money to spend on steel-gobbling infrastructure projects, Burns said. But if China, with its massive production capacity, were to fall into a tailspin, it could prove devastating to world steel markets, he said. "Would China look to put its metals in other markets, or would it ratchet back production? That question got put in the bottom of the drawer for a while, but now it's back front and center."

Source: American Metal Market, January 22, 2008