In its latest ‘Market Update’ for March the American Institute for International Steel (AIIS) list nine reasons to be pessimistic about the US recovery but counters these with seven reasons to be optimistic.
Looking at the factors for pessimism, AIIS say one of the big issues in the real business world – as opposed to the Washington DC world – is uncertainty. Uncertainty is an investment and job killer. As the US economy approached Q4 2012, not only did the elections create uncertainty as they always do, the fiscal cliff related uncertainty increased and businesses reacted predictably and did not make decisions to invest or hire. They simply had no idea what the cost of new – usually less experienced and therefore less skilled – employees would be. Likewise, without knowledge of taxes related to depreciation or other corporate taxes, companies did not invest − unless the investment was absolutely necessary to keep their company operating or was going to be so obviously profitable that anything our government did would not hurt it.
In the steel world, the normal cyclical phenomenon occurred at the end of the year related to inventory taxes and so the combination of the uncertainty with the normal elimination of inventory had a distinct negative effect. Multiply these factors across the whole economy and there is a clear problem.
In a normal year without the uncertainty factor weighing on businesses, the steel market makes its normal comeback in the first quarter of the New Year. But this year, not at all as the USA is in the midst of a hangover from the uncertainty related to the so-called fiscal cliff and to a lesser degree, the now being applied sequestration. Business decisions are made in advance, and decisions that would have been set in motion in a normal first quarter rebound were delayed due to the fiscal cliff. David Phelps. President AIIS believe that the good times are delayed and not eliminated.
If we consider the good news list: one of the things that has kept the auto sector healthy is pent up demand. At the bottom of the recession in 2009 auto demand was around 9M for cars and light trucks. With an estimated 240M cars and light trucks in service in the USA, that would mean that the fleet would turn over every 26 years. Also, there is new demand for autos added every year as increasing numbers of people reach the age where they purchase cars. Clearly, the 2009 rate was not sustainable and pent up demand has been driving the sector since 2009-2010. Auto experts are predicting a return to the heady days of 16-17M units in a couple of years as a result of systemic growth and replacement.
A similar case can be made for non-residential construction. First there is the general expectation based on history that a year after the residential construction market is healthy, the non-residential construction market will follow suit. That, plus what is now 4 years of pent up demand has to have a positive impact on this critical steel consuming market. Most pundits believe that it will be 2014 when noticeable improvement will be experienced. This is a critical trigger for the economy as a whole. The construction industry is an important employer and when the sector improves, it will help substantially drive down the unemployment rate, with a positive rippling effect through the economy.
In addition, oil and gas related steel demand (OCTG) will improve when the inventory overhang is eliminated. No one is calling for a substantial decline in drill rig numbers and so overall demand should hold up.
Other steel related markets look poised to improve too. The service centre data also suggest that while things are slow right now, inventory is being drawn down and buying will resume, albeit later in the first quarter than normal. This is another uncertainty hangover we are slowly getting through. As we all know, inventories will get to a point that orders will improve, lead times stretch out, prices increase and imports become more attractive.
On balance, Mr Phelps concludes, 2012 was a front loaded year and 2013 is likely to be a back loaded year with the good times starting later than normal. In the end, it is likely that another small step towards a healthy level of demand, pricing, domestic shipments and imports will be seen in 2013.