By: AccuVal Associates, Inc.
U.S. steelmakers are experiencing a trend that points to out-of-balance supply and demand for current production. The issue isn't a lack of demand from manufacturing but rather a continuing lagging construction sector. Although current conditions for steelmakers aren't dire, they're not thriving, either. While 2011 was a relatively good year for the industry, revenue was still lower than it was in 2008.
American steel producers continue to operate below maximum capacity, and steelmakers are effectively managing the lack of demand with plant shutdowns as they handle current inventory levels and try to set a floor on prices. As a result, steel prices have recovered from their 2009 low, and though 2012 is shaping up to be a questionable year, the price of steel hasn't been greatly affected by economic uncertainty so far.
China is currently the world's largest producer of steel, providing approximately 45 percent of global supply. The country is currently in a controlled economic slowdown as the Chinese government tries to control rampant inflation and an exaggerated real-estate boom that hit between 2009 and 2011 due to restricted lending. It appears the efforts have been working, as China's GDP slowed 8.1 percent during the first quarter.
This effort, coupled with the economic woes that exist in Europe (a large importer of Chinese steel), meant that Chinese exports decreased by 6.8 percent to 4.5 million metric tons from March to April 2012. This is an 18.3-percent decrease from the most recent export peak in June 2010. Accordingly, China will have to find alternative solutions to deal with softer steel demand, both globally and domestically, and this could potentially weaken steel prices in the future.
As the steel market has become increasingly globalized, domestic producers have been reluctant to expand capacity because of heightened global competition. In fact, domestic producers are continuing to consolidate and reduce domestic capacity. Coupled with ever-increasing costs from seaborne (imported) iron ore over the past few years and increasing environmental standards, the domestic industry is more focused on reducing costs and increasing quality than increasing capacity.
In fact, though China is the largest exporter of steel and the U.S. domestic market is the seventh-largest importer of Chinese steel, Chinese steel has been plagued with quality-control problems. Much in the way that the remaining American textile industry has focused on high-cost advanced textiles, the domestic steel industry is focusing on technological advancements and quality control, worrying less about volume. In 2011, seaborne iron-ore prices were up 28.1 percent from 2010, costing domestic steelmakers $25 billion dollars more in securing imported ore.
More than half of China's steel (according to recent estimates, approximately 58 percent) is used for construction, and commercial- and residential-property construction account for approximately 11 percent of China's economy. To reiterate, the Chinese government is trying to deflate a real-estate bubble that occurred from 2009 to 2011, and its monetary-policy efforts appear to be working, as Chinese real-estate analysts are noting a trend called a "negative feedback loop."
Under this trend, real-estate projects are nearing completion, but new construction projects are not being implemented. Vacancy levels have increased, and though developers are willing to finish old projects, they're hesitant to start new ones. While the full effect of the negative feedback loop has yet to be felt by Chinese steel manufacturers, as current construction projects wrap up, the lack of new projects to take their place will undoubtedly put download pressure on steel prices.
While economic problems still exist in the construction sector, automotive sales have rebounded off their lows. Because of this, auto-industry demand for steel continues to increase. The U.S. annual auto-selling run rate finished at 13.8 million vehicles in May, off its recession lows of less than 10 million units. As the average domestic vehicle age continues to reach record levels (currently 10.8 years), demand for new vehicles should continue to increase, assuming all else remains equal. The automotive industry is coming out of its consolidation phase, and companies such as General Motors are working at more than 100 percent of plant capacity, making heavy use of overtime and third shifts. Continued strength suggests that the auto industry is poised to finish 2012 at a 14.5 million-vehicle pace, a projection that should continue to help support steel production.
Demand continues to increase in the energy sector, considering the increased interest in alternative and renewable energy sources, such as wind-turbine towers. Companies such as Siemens Wind Power are capitalizing on the growing popularity of alternative energy and have contracted companies including Tata Steel to increase production of profiled steel plate (cut to a desired shape) to be utilized in the production of wind towers. Continued demand from conventional sources of energy (oil, gas, and coal) continues to grow, and the underlying commodity demands are prompting capital expenditures on machinery and equipment, as well as infrastructure improvements like delivery pipelines. Additionally, worldwide electric power demand is expected to increase over the foreseeable future, which should spark additional demand for steel.
While demand for steel from China is softening, the domestic industry continues forging ahead focusing on technological advancements, renewed auto expansion and energy-sector opportunities.
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