Dark Days Possible

Steel markets are gloomy, and it’s no surprise. Since this summer, bad news has flooded the steel industry. Declining auto sales, slowing housing starts and general economic problems are among the concerns that have translated into reduced demand for steel.

The recent collapse in credit markets and its residual effect on the global economy have only added to the steel industry’s woes after several years of stellar steel markets.

Far from being isolated to the United States, the steel industry’s problems are being felt throughout the world. Recent announcements, not just from the United States, but also from Europe and Asia, have sent stocks in publicly traded steel companies spiraling downward.

Only recently, China has announced that several of its largest steel mills have halted production in light of limited demand for finished products. A recent industry report notes that in early October five Chinese steel firms—Baosteel, Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel—agreed to cut production by up to 20 percent, perhaps until the end of this year, in an effort to support falling steel prices. Baosteel, one of the largest steel companies in the world, indicated that it would cut its production by as much as 1 million tons by the end of 2008.

Adding to the difficulties, industry reports also note that an additional five steel mills in China have declared bankruptcy because of an inability to pay bank loans.

The China Iron & Steel Association, Beijing, says domestic steel demand in August 2008 declined by 6 percent from the previous year. Further steps to reduce output could mean additional shutdowns of plants, temporarily or permanently.

Similar problems are sweeping many other large steel companies. Severstal, based in Russia and one of the world’s largest steel companies, has responded to declining demand for steel by announcing plans to cut its production by between 20 percent to 30 percent immediately. These cuts, the company says, will occur at its European and U.S. steel mills. Severstal says it will reduce crude steel production at one of its Russian steel plants by about 25 percent; in the United States, Severstal will reduce production by nearly 30 percent across all of its facilities; and in Italy, the company scheduled October production cuts of 30 percent.

Luxembourg-based ArcelorMittal, the world’s largest steel company, is drastically curtailing its production schedule to compensate for softening demand. According to several published reports, the company is cutting steel production at its Ukraine steel mill by 50 percent; at its Polish steel mill by between 10 percent to 15 percent; and has shut down some blast furnaces in Spain. ArcelorMittal also is taking downtime and idling plants throughout its global network of steel mills.

Other steel companies, both in the United States and abroad, are employing similar tactics in an attempt to bring supply and demand back into balance. Charlotte, N.C.-based Nucor Corp. has announced plans to idle one of its electric arc furnace (EAF) steel mills for a few days in October. While the company has resisted more significant plant closures, it has been cutting prices for some of its finished steel, in some cases significantly.

The cuts in production have been extreme, as reflected in recent figures released by the American Iron and Steel Institute, Washington. Statistics from the week ending Oct. 11 saw domestic raw steel production at slightly less than 1.9 million net tons, with a capability utilization rate of 78.3 percent. This is a sharp decline from the same time last year, when production was 2.1 million tons and capability utilization was 88.5 percent. Production for the week ended Oct. 18 represents an 11.5 percent decrease from the same period in 2007. The figures for the third week in October were down 3.8 percent from the prior week, while the capability utilization rate also declined.

The woes hitting the global steel industry are even seeping into countries that only recently began enjoying healthier manufacturing sectors. Eastern Europe, which saw a pickup in manufacturing as many Western European companies shifted their business to this less expensive region, also is starting to feel a major pinch in steel orders and prices.

Adding to these challenges, the global economic crisis remains at the forefront. With access to credit still difficult, it’s uncertain when a turnaround will take place, either for the global economy in general or for the steel industry in particular.

According to a number of recent reports from steel industry analysts, challenges in the steel industry will continue, with only a modest bit of optimism being expressed for the first quarter of next year at the earliest.

A market report on the steel industry by Goldman Sachs says global steel traders and service centers are reporting that global steel trading has "ground to a halt." Prices for many steel products are in a freefall, with some prices almost half of what they were earlier this year. Adding to the pessimism, the Goldman Sachs report also notes that despite the sharply lower prices, steel buyers are few and far between. "Global steel prices have fallen even more than domestic prices, making U.S. prices [among] the highest in the world," the Goldman Sachs report notes. "This makes the U.S. more vulnerable to imports and reduces export opportunities that domestic mills have enjoyed thus far throughout this year."

Overall, according to a recent report by World Steel Dynamics, Englewood, N.J, the challenges for the global steel industry will extend through the second quarter of 2009. Peter Marcus, the author of the report and managing partner of World Steel Dynamics, writes, "Reflecting the collapse in new orders, resulting from both reduced steel demand and steel buyers’ intentions to pare inventories, steel mills the world over are racing to cut production sufficiently to not be disadvantaged by a surge in their own inventory."

Marcus forecasts that by the end of this year, global steel production will decline by 20 percent from figures reached during the second quarter of 2008. And, he adds, no particular region of the world will be exempt from the production declines.

Reflecting on the impact that China has had on the global steel market, Marcus’ report notes that steel traders in China, who purchase perhaps 65 percent of the mills’ hot-rolled band and related products, seem to be afraid to place orders. "Steel traders in China are a speculative lot; they are always on one side or the other of the crest of the wave," he writes.

While China has been the linchpin for the booming commodity markets, problems exist with some burgeoning sectors. A recent report by Deutsche Bank notes that Dubai has a significant oversupply of rebar. While a small component of the overall steel industry, petrodollars that have been pouring into the Middle East have resulted in huge infrastructure investments that have helped to boost steel demand in these oil-rich countries. The report notes that Dubai has roughly 2 million metric tons of rebar currently in stock, with another 600,000 metric tons on the way. With Dubai consuming around 380,000 metric tons of rebar per month, it has enough supply to last until February 2009.

Throughout the past several years, a weaker U.S. dollar has been a boon for domestic steel producers, but the strengthening of the dollar has eroded much of this advantage for the domestic steel industry.

Even if a company lands an order for an export shipment of scrap or steel, some financial institutions are reluctant to issue letters of credit for such a shipment. This method of payment has traditionally been one of the most readily used in overseas shipments.

However, with more banks unwilling to extend credit, it is becoming more difficult for shippers to obtain letters of credit for their shipments. Exporters who trade on a spot market basis and who do not have the luxury of a well-established relationship with the shipping company have had the most difficulty in obtaining letters of credit.

In addressing the slumping market for ferrous scrap, the Goldman Sachs report notes: "Prime grade scrap has declined by almost 60 percent within a span of eight weeks, while obsolete scrap is down around 50 percent. Despite these falls, we still do not see a bottom in scrap prices. We believe a reversal in scrap prices would be a positive sign and could signal a bottom for steel prices. Scrap prices have declined more than steel prices, and we see widening near-term metal spreads at mini-mills. However, it is also bringing steel prices down, but in our view, it is just a matter of time when spreads return to more normal levels."

Recent reports indicate that the continuing financial crisis is creating problems in such areas as counterparty risks, bankruptcy possibilities and order cancellations. Reportedly, several large shipments of scrap metal have either been turned back after being loaded for shipment or have had the orders revoked at the dock, forcing scrap dealers to scramble to shift the material to other sources.

Many of the steel analysts see further bleakness for the industry throughout the next several quarters. However, all is not doom and gloom. The significant cuts in production could accelerate finding a floor for both steel and scrap prices. According to Goldman Sachs, though, it may take several months before the production cuts have the expected ripple effect.

Because of their cost structures, mini-mills might be best suited for a steel industry recovery. The steep decline in ferrous scrap prices has given some of these EAFs the opportunity to widen their margins, making them fiscally stronger.

In his report, Marcus says he expects a recovery in the steel industry to begin by the second half of 2009. The improvement could result in a much stronger steel market in 2010, he says. Some of the reasons for his optimism include the fact that mills will have reduced production to a level below demand; steel demand will begin to recover; and steel buyers may want to replenish some of their inventories.

"In 2010, we place the odds at about 30 percent that steel shortage conditions recur, reflecting the inherently tight supply of steelmakers’ metallics (especially steel scrap) and imbalances in the global steel industry’s steel consumption and import/export patterns," Marcus writes.

The timing may be slightly different, but the sharp reduction in steel production by steel producers will likely cause prices to "overshoot to the downside over coming months," according to Goldman Sachs. "However, as these below-cost offers evaporate, global financial turmoil eases and inventory liquidation by the service centers and end users runs its course, we expect prices to start to recover."

It may be just a matter of time, but in the meantime there is likely more pain in store for both steel producers as well as for scrap dealers who supply them with their raw material.

The author is senior and Internet editor of Recycling Today and can be contacted at dsandoval@gie.net.