Who’s full of it, optimists or pessimists?
Mr. Gloom: Wherever you look, you’ll see crisis after crisis. Economies in Europe and the US are stalling and some are even on the brink of another downturn. Add to that the enormous amount of debt burdening the US and the Eurozone and you can easily see that the next economic meltdown is just around the corner. I need your famous mumbo jumbo to cheer me up because reality is downright depressing. Despite some brave attempts to keep the steel prices up in Europe and the US, they are not driven by demand, and should there be no economic turnaround coming soon—and none can be seen on the horizon—the steel market will collapse under the lack of demand. Even China, of all places, is slowing down. The only stability in the steel market is in scrap prices, but the question remains how long it will last. Forecasts for residential and commercial construction now point to a recovery in 2013 at the earliest and unemployment is simply not getting better. You know what the many unemployed people are doing? They are waiting for your freight train that left the station early this year to arrive.
Mr. Bull: Demand has been weak since late 2008, yet the price of raw materials, scrap, long and flat rolled products are extremely strong in historic terms. The truth—whether you want to see it or not—is that steel is comfortably chugging along. Steelmakers, service centers and even traders are making money in the new normal. Yet everyone loves to talk about the Great Recession, or possibility of a double-dip recession, or even an apocalypse based on the lazy Greek economy and stagnant job growth in the US. If we stop worrying about one thing, another one pops up. Don’t you think these are just juicy stories to keep the newspapers selling? The media certainly have a huge stake in making much ado about nothing; you see the stock market go up and down like crazy from day to day, yet we know companies and economies don’t move that fast. Nothing changes, except our perception about things. So relax, sit back and stop worrying about things so much—we are doing just fine. Okay, I agree that we can forget about construction-related demand for steel products until 2013, but all your other comments, including China slowing, are false.
Mr. Gloom: Yes, there are exaggerations in the various media because that’s how they sell the news. But in many cases the hyperbole is based on truth. The steel industry is chugging along comfortably? On which planet? Some shipping numbers look alright for some domestic mills but only compared to the catastrophic year of 2009 and the “recovery” year of 2010. So far this year, US Steel’s stock value has declined 49 percent and AK Steel’s went down 47 percent. In 2007, US Steel had a market capitalization of over $20 billion; now it’s just $4 billion. Even the market leader and arguably the best managed major US-based steel company, Nucor, had to issue profit warnings for the third quarter. Their earnings are expected to be down 40 to 50 percent. Chugging along comfortably sure looks different in my world. As for raw material prices, you’re mostly right; of course, one could easily interpret the huge discrepancy between scrap/iron ore and steel business volume as just another bubble. We are getting used to it, are we not? Now, you can shield out all the bad economic news and continue to look at the world through your special lenses that only show a perfect world. In reality, the advanced economic powerhouses are all struggling and drowning in debt. How can it not have an effect on the global economy in general and the global steel business? You do know what profit warnings are, don’t you?
Mr. Bull: There is no bubble in raw materials, only scarcity of supply (primarily with scrap) and strong demand from steelmaking. That’s the reason the raw material prices are high. No matter how much the steelmakers whine about high raw materials prices, they keep buying them. Maybe steel production hasn’t reached the pre-crises levels of 2008 in the US and Europe, but it sure reached and exceeded that level in the world as a whole. We currently produce and use more steel in the world than the pre-2008 era. What does this tell you? True, the West is struggling still but how much does that really matter? Not much, when China, Brazil, India, Turkey and other emerging countries are marching on.
Don’t believe me? Let’s talk about products. Flat rolled has certainly hit bottom; granted it came down long and hard but it’s bound to go up strongly again—in today’s paranoid environment, no one wants to keep any stock. So, we collectively get caught short and long and this makes prices very volatile. The roller-coaster is heading up again—the only question is how high it will get.
Longs, led by rebar, have been strong lately, demonstrating a much saner pricing graph throughout 2011—they haven’t gone down too much and they are slowly rising even though construction is awful and scrap prices are high. Yet mills keep hanging on, with each year proving to be an improvement.
As for traders, it’s been a quiet summer, but early 2012 delivery is upon them. If history repeats itself, we will see another huge rally again in the fourth quarter for first quarter deliveries.
Mr. Gloom: Well, at least you do admit to a roller coaster ride, which is a far cry from your unstoppable freight train you mentioned earlier this year. Yes, you are right that the buying pattern in the steel business has become unpredictable and spotty. That’s why scrap and iron ore prices do not make any sense on many occasions. You must have noticed how the stock markets in Europe and in the US have dropped iron ore companies like hot potatoes because their prices are overvalued compared to ever-fluctuating steel prices. Your pricing upticks in flat rolled and rebar are bound to come down again as the ramifications of the softening economy are seeping into the steel industry. Why else would there be profit warnings or downright ugly financial numbers (e.g. US Steel)? All right, so the summer was a wash-out, but what makes you think that the next couple of quarters will see a renaissance of the steel business when economic indicators point to yet another recession? The US Federal Reserve has admitted to that in so many words and has launched yet another rescue program, this time with a “twist.” So your rebar prices have shown some sanity and flat rolled has clawed back some of the huge price losses from early summer; this cannot be sustained in view of a steadily dropping economy. Your much anticipated stock replenishing will go out with a whimper.
Mr. Bull: Going for another recession? Sorry, my friend, but that’s nonsense! There is an election next year. Even if we were headed for a recession, you bet your mama Obama will try everything to keep the economy ticking. That’s why he is trying to roll out the $447 billion American Jobs Act, which will bring a new $105 billion in infrastructure spending money which is always good news for steel. The act will also reduce payroll taxes to help companies hire new employees. We are far from falling into another recession—US companies are healthy and making great profits. Financial institutions, and even the car makers are nicely bailed out and doing great. Caterpillar and John Deere are very busy, trying to catch up with their orders. Green technology companies are coming up in the world and consuming steel in the process. American manufacturing is also strong and growing. Yes, there are a lot of skeptics like you out there who cannot believe that growth and demand are here and steadily improving. Secondly, low stocks and the extended summer lull will prep the scene for another strong rally. Scrap should go up again in the winter because of a slowdown in demolition and collection, and steel—in all shapes and grades—will join the ride. The time to make that big first quarter purchase is now, while people like you are still sleeping or wallowing in their own negativity. Hesitation now, shortage in the spring. It will take a little courage and a little faith but I assure you, you won’t regret it.
Mr. Gloom: I ought to inform the IMF and the World Bank of your audacious prediction and reasoning about no recession—perhaps they can stop upsetting everybody with warnings of imminent doom. Better yet, let’s give them an extra pair of your rose colored glasses. The President has very limited influence on the well-being of the economy and an awful lot of people would argue that it was he who made a serious situation worse. But let’s not get political and let’s look at what happened to the last stimulus package that included a major infrastructure component. Where did it go? Did you see an appreciable uptick in the steel business on account of that project? I haven’t seen nor heard nor read about a positive impact with steel users in relation to the last stimulus package—must be my clear reading glasses. Moreover, prognosticators have analyzed that, based on current average prices and production, $50 billion for infrastructure would translate into 10 additional steelmaking days (give or take a day). It is hardly the panacea it is touted to be. I do find common ground with you on the money that US companies have stashed away and, with Caterpillar and John Deere as exceptions, will not invest because they don’t trust the current administration and economic conditions. By and large, American companies are expecting another—you guessed it—recession.
Mr. Bull: You are full of it, Mr. Gloom! Just crawl up into the nearest hole and hide from the real world. Yes, we live in perilous times and the US and Europe have definitely seen better economic days, but they also have all the tools to overcome this crisis. Unfortunately, recovery takes a long time and people are getting restless. But some of the indicators—those that don’t get overblown exposure like others—are not at all bad. First and foremost, take the steel industry that you are trying so hard to put down. US mills are surviving, prices are up and inventories are managed exceptionally well. But times have changed. We have new tools and new markets to explore that will steer us through these gloomy times and back into a solid growth rate before you know it.