Dwindling inventories, new orders bring life back to idled mills
By Emily Glazer, MarketWatch
SAN FRANCISCO (MarketWatch) – The U.S. steel industry, hard-pressed by a recession that wreaked havoc in its main markets and forced thousands of layoffs, can now point to several indicators supporting the contention that it’s through the worst of the downturn.
After months of sluggish demand and swelling inventories, prices and demand are again on the rise, production indexes are up and some mills are firing up idled blast furnaces.
And while Census Bureau data through May shows steel imports are still lower than they were a year ago, more recent industry data points to an uptick in demand.
The Institute of Supply Management’s June production index hit 52.5%, up 6.5 percentage points from May. This is the first time the index has topped 50% in nine months. A reading above 50% indicates the manufacturing industry is expanding, said David Phelps, president of the American Institute for International Steel, Inc.
Market Vectors Steel exchange-traded fund has jumped more than 40% since the beginning of 2009, compared with a small loss over the same period by the Standard & Poor’s 500 Index .
The rebound follows a nine-month “purge” of inventories that forced steel producers to severely curtail output while a weakened market drew down excess supplies, said Michelle Applebaum, a former Salomon Brothers managing director who runs her own research firm in Highland Park, Ill.
Yet once supply and demand balance out, it’s a “green shoot” for the performance of the steel industry, with higher output leading to cheaper production cost by volume, Applebaum said. Nevertheless, she cautioned against drawing direct parallels between the performance of the steel industry and the U.S. economy.
“The outlook for the remainder of the year remains uncertain, but is improving, as demand is strengthening for some of our steel products and recycled metals,” said Keith Busse, Steel Dynamics chairman and chief executive officer, in a June statement. “We now expect to be profitable in the third and fourth quarters of 2009 assuming only a modest increase in production volume.”
Still, Phelps said he questions how strong the improvement will be.
“When prices are going up, people rush to be the first in line to order more steel in a good market and generally in a rising market people overbuy,” Phelps said. “So that when the market turns down and steel is still cyclical, the impact is magnified by the fact that all the sudden demand is down and their inventories are way too high….It’s one of those things that you’ll have to sit back and wait and see.”
And the overseas market has also weakened. Global steel production fell 24% in the first four months of 2009 compared with the same 2008 period. While China leads the market, its January-April steel output is still down 3.9%, German production is down 53.1%, Japan’s is down 43.6% and U.S. output is off 53.4%.
“It’s a global commodity [currently] determined by China,” Applebaum said.
The summer months do show some promise. Some analysts said they expect the industry’s operating rate to rise to 60% from 40% currently to match improved demand. Keybanc Analyst Marc Parr said if there is demand recovery, then the number will continue to increase as remaining inventories are drawn down.
This is reigniting the industry, literally.
Some mills — including U.S. Steel’s Granite City, Ill., facility — are firing up furnaces, bringing back hundreds of jobs.
Nucor Corp.’s Chairman Dan DiMicco said in a June statement that orders had improved in recent weeks. “We believe this period of economic and steel industry distress will present unusually attractive growth opportunities for Nucor,” he said.
In the June ISM survey, 57% of respondents said they expect receipts to increase over the next three months, compared with 21% in May. The number of respondents expecting additional incoming orders during the next three months increased to 43% from 29%.
“The hope is that the infrastructure spending and consumer spending, which looks like it’s starting to pick up, will help sustain the prices and see a return to health by the end of the year,” Phelps said.
While stock performance in June was mixed — 21 stocks topped the S&P 500 while 20 came in lower — there were some stellar performers: Metalico Inc.’s shares increased 85%, and there were more than 30% gains for Barzel Industries , AK Steel and Olympic Steel Inc .
Though analysts hold different views of where to look for improvement, consumer markets are unanimously seen as the most disadvantaged due to their exposure to the ailing automotive and residential housing sectors.
“With the auto sector you’re squeezing that back into the balloon right now and it’s going to pop out,” Phelps said. “Where and when, that’s the question.”
As for the construction industry, Parr said it has not yet bottomed out.
“The normalization of mill orders and underlying demand is a more important factor in the near term as will be the ability of U.S. producers to move pricing to be more in line with global markets,” he said.
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