2012: Another year of transition or long-awaited turnaround?
Mr. Gloom: This certainly has been a difficult year for most industries and the steel sector is no exception. The first half of 2011 seemed to prove you right and I was about to eat my words, but the second half of the year unfortunately proved me right. I must admit that sometimes I hate to be right, but so be it. The economies in the US and in Europe positively buckled under the debt load and a lot of other economies have either stalled or are on the verge of doing so. Steel consumption results for 2011 will still be decent but prices have started to slide severely and I don’t see much of a reversal in 2012. Pricing at the end of 2011 was definitely more in tune with reality than it was at the beginning of the year, but what will 2012 bring? Given the dismal state of the developed world it can’t be all that great unless a specific industry or a specific market can “step up to the plate” as the saying goes and hit a lot of home runs. Emerging super performers such as China and Brazil have to cope with their own problems of shrinking growth or spiking inflation and cannot be relied upon to carry the global economy on their shoulders. So who will it be? The EU? Hardly. The BRIC countries? Unlikely, because the strong economic cycle seems to have run its course. The US? Intriguing (and perhaps the best bet), but how could they positively manage this when their debt load overshadows even the Eurozone debt?
Mr. Bull: Wow—I think I might actually agree with you on something. The US is doing better than Europe and may indeed come to the rescue once again. Europe had the same problems as the US but didn’t do a good job cleaning up their act and didn’t do enough to stimulate its varied economies. Now the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are about to pull the world economy to the brink of crisis again. But it won’t get there this time. The US has been working on getting back on track and for the most part its main industries are healthy and consumers are spending again. However, I’m not putting all my money on the US being the game changer here. The real credit will go to the relentless growth in India, Turkey, China, Brazil and the rest of Latin America and even Africa. While Europe is struggling, these guys will keep marching on. Have you been to South America lately? There is no sign of a global crisis there. Their cities are bustling with big projects—cranes are everywhere. People are out and about, filling restaurants and shopping malls. Latin America went into the global financial crisis for only one quarter and then totally forgot about it.
So why would we think 2012 will be any different for them? Their people are working hard and playing hard. They smelled the sweet success of capitalism and want to duplicate it for themselves. They would like to live in nice houses and drive nice cars and take vacations in fancy places. Let the PIIGS roll around in the mud; others will do just fine and carry the world economy and steel markets along with them.
Mr. Gloom: In the last couple of years you insisted the relentless growth in Asia would keep the world going. Now you’re tooting your horn for South America and (really?) Africa. Have you checked the average income in these countries? Let me help you out here: it is not all that much. All this growth is predicated on exports to the US and to Europe—two highly indebted areas. Consumers in both these regions don’t have the means to bail out the rest of the world and neither do the Chinese and the Indians. Some countries such as China will continue to buy a lot of raw materials for their manufacturing industry to make gadgets and things that they will not be able to sell in the tired developed world. Africa’s growth spurt is of interest for that continent only—it will have no bearing on the global economy. No, 2012 will be a disastrous year—unless a giant such as the US finally wakes up from its slumber.
Mr. Bull: You have absolutely too little confidence in the emerging markets and your mind has been closed for a while in that it is these countries, of which China is just the biggest engine, which will keep the global economy going. Forget about the PIIGS in Europe—that is so yesterday. Instead, think BRIC (Brazil, Russia, India, China). They have the growth; they have the demography and they have vital raw materials. Emerging countries have been the engine for at least a couple of years. In fact, some studies indicate that as early as 2012 this bloc will carry over half of the world’s gross domestic product. Where is the thriving German car industry selling its sophisticated performance cars? To China, of course. Who has been the vanguard of environmentally-friendly and efficient vehicles? Brazil, not the US. Where is the demography very much in favor of the young generation which also has increasing spending power? Brazil. Who has enormous reserves of natural gas that can and does supply huge areas in Europe and Asia? Russia. Finally, let’s not forget the huge role of Brazil supplying iron ore to the world. This is where the action is for the time being as the tired and aging Europeans and the dithering Americans are trying to figure out their problems. But let me not be too harsh on the Americans. Yes, they are up to the ears in red ink and yes there seems to be politically motivated inertia in Washington that is dangerously close to becoming an insurmountable problem. But please don’t underestimate the resilience of the US. This year, 2012, will probably be a historic one when exploitation of the vast natural gas fields in the Dakotas, in the Northeast and in Texas will begin in seriousness. Energy independence and a booming drilling business are just around the corner and so is the resurgence of US and, indeed, the world.
Mr. Gloom: Mr. Bull, you naive oaf, you really must read other newspapers in addition to your daily dose of unreasonably optimistic headlines. If you did, it would have occurred to you that Brazil, apparently your current champion of global economic growth, is going through a difficult period because their economy is slowing down to the point of stalling. There is a strong likelihood that they will come back next year but it won’t be during the early part. Their hot commodity, iron ore, is not quite so hot any longer and the price for Q1 of 2012 has gone down to the tune of 10 to 14 percent, depending on grade. What could possibly be the reason for this? China is not buying as much as they used to. Their own economy is slowing and, consequently, there will be less demand for steel. So forget about Brazil and your BRIC countries. I will count China as a major force in terms of buying raw materials but Brazil is clearly taking a breather and will probably swamp the world with more of their steel exports as their own economy is adjusting downward. The US does not need more imports because the steel market is weak enough as it is. Pricing, mostly for long products and most basic tubular goods, is going down, following the hot rolled coil path of a few months ago. The latest price hikes here are desperate attempts to stem the downward flow. No, this year will be another year in transition and maybe 2013 will see the long awaited turnaround.
Mr. Bull: What are you talking about? Just because your beloved long products are going down, does not mean that other steel products will follow suit. Hot rolled coil prices in the US, a bellwether if there ever was one, started turning around at the end of 2011. And why shouldn’t they? Customers are buying them as soon as they’re on the market. Latest available numbers show US crude steel production was up 6 percent in the first 10 months of last year. Economic indicators toward the end of last year started to point up—just look at November’s unemployment rate, a 2.5-year low—and there is no doubt that the final steel production rates for 2011 will be close to 8 percent above 2010 (not too shabby). And here is another positive indicator: Americans are buying “stuff” again, including cars. Ford and GM are making money again and Chrysler will be there before long. Total car sales for 2011 will be at least 10 percent ahead of 2010 and light vehicle production will be around 10 percent ahead as well. Why do you think hot rolled coils are going up in price? The latest figures in the much-watched Purchasing Managers’ Index (PMI) were solidly in the growth area and at a faster pace. What is it that you do not get?
Mr. Gloom: What I do not get, my blinded friend, is where the US is going with all its debts. The Federal Reserve has been printing plenty of money and seems to be determined to continue to do so. Call it quantitative easing if you want; it is still printing money and at one time you have to pay the piper as the saying goes. The US unemployment rate might look good right now, but consider another index that takes into account the “underemployed” and the people who have given up looking for a job, and you’ll find the “real” unemployment number is closer to 16 percent. The middle class is not only suffering, it is shrinking. Who will buy all these shiny new cars that American manufacturers are churning out? You do know, do you not, that your phenomenal sales and production figures of the US car industry are relatively minor in historical context? So are the latest upbeat housing starts data. By the way, how could you possibly have missed that the US started building houses in excess of 600,000 units again? All of it is a flash in the pan, if you ask me. So, the US shows a positive PMI index. How about this fact? Brazil, UK, Germany, Japan and even “mighty” China are all in a contracting mode according to their own PMI indexes. The US stands alone as far as positive economic developments are concerned, but will that be enough to overcome weakness in the emerging markets and disaster in Europe, especially in view of the huge debt load that is burdening the US? Let me give you a clear answer: No—not by a long shot.
Mr. Bull: All right, so you are an incorrigible pessimist. Yes, you can find something negative everywhere. Don’t be too close minded, though, or you might not see the upward trend that will run through all of 2012 and even get stronger in 2013. There might be some corrections to the European Monetary Union (EMU) but the Euro will not fall apart—it might lose on value but that will only help some of fringe countries of the Eurozone to export themselves out of the predicament they are in now. Plus, Europe will remain more or less intact because America will not allow it to fall apart. As the US is working through its own problems, its own market will become an important target for European and Asian exports again, even China, which will not export as much to the US once its currency strengthens. I do admit that our New Year will be a difficult one in many ways; but it does not necessarily need to be a dismal one. Too many factors are in favor of solid growth worldwide.