Time to say “I told you so”?
Mr. Bull: Once again you must have been very satisfied with recent events that, on the very surface only, seemed to support your dire outlook. It appears that the global economic recovery in general is taking a breather and, specifically, most advanced economies are struggling once again. Growth in the US is faltering and the Eurozone seems to be in permanent bail-out mode. But don’t say “I told you so” just yet—the present weakness is only temporary. By and large, the fundamental drivers of growth remain in place in most advanced countries including the US, and baseline projections of global growth have not changed. The International Monetary Fund still expects the advanced economies to grow 2.5 percent this year despite the current lull, and emerging markets will rumble ahead at 6.5 percent. In the meantime, US corporations are making huge profits, but they’re just not spending it—unofficial numbers have the accumulated profit retention at over $3 trillion, and they can’t hoard it forever. As for the steel industry, the weekly average of US steel production through the first half of June was just a tiny fraction under the 2008 weekly average but way ahead of 2009 and 2010. Even Europe as a whole will come back and don’t look at Germany, France or the UK. There is “emerging Europe” now and there is no better example than the strong demand cycle that Turkey has been experiencing for quite some time now.
Mr. Gloom: One has to admire your relentless optimism even in the worst of times. Here we are, the entire world market is saddled with a desperate glut of steel and no orders, and you are still deeming the situation temporary, rather than catastrophic—your GDP figures mean nothing in terms of steel consumption. There is no question that the global recovery has stalled; hot money is gone and there is nothing else any government can do anymore. The “Japanification” of Europe and US has begun, with virtually no growth and zero interest rates for many years, or maybe decades, to come. Of course the emerging countries are doing better and still growing, but not as much as before. The big gorilla amongst those—China—has slammed on its breaks to deflate its real estate bubble, and once again, Chinese steel mills are getting ready to flood the export markets.
I know you’re trying to put on a brave face, but I just don’t see any light at the end of the tunnel. I would say this year is a repeat of last year at best. Get ready for a dry summer and fall…
Mr. Bull: Mr. Gloom, if you checked hyperbole at the door your outlook might turn a bit rosier. Japanification of Europe and US? Where did that come from? While there might be some temporary similarities, the fundamentals between Japan and Europe or US are very different. Last I checked, most European countries are still growing—same goes for the US. Also, the inflation rate is increasing which, in terms of your hint at stagflation, is a very important factor. Moreover, despite some rhetoric to the contrary, the US still has a very lively immigration rate which gives them a constant pool of new talent, and the economy is the better for it. You can just keep Japanification to yourself. Yes, growth is tepid in the Western world and the reason is very clear: after the big crisis of 2008 and 2009, debt levels soared exponentially in the US and Europe. But look at the US auto industry, which is about to single-handedly pull the US economy out of its current funk. Cars are selling well and will continue to do so for the remainder of the year. And “steel glut”? Inventories are low! There you go again with your hyperbole. Steel sales might have slowed down but we are far from a glut because the industry has managed to adjust their production accordingly and maintain strict price discipline. The world’s largest steel company, ArcelorMittal, has announced its increased forecast for the rest of the year. They expect increased steel demand even in your Japanified US and Europe. And Japan itself? After their cataclysmic catastrophes in March, they are pulling back as well. It is an arduous process but industrial giants such as Nissan and Toyota have pledged to maintain domestic manufacturing. Look at the economic indicators. Even Japan is not Japanified anymore. Kanpai!
Mr. Gloom: Wow, don’t get worked up, brother! And what’s your love for Europe about? If you take a six-week vacation, borrow up to your eyeballs and put a swimming pool in your backyard, you become like Greece. Soon Germany will have to bail Portugal, Spain and Italy out too. Things are not looking up in Europe, that’s for sure.
There is only so much you can do by ignoring the fundamental problems, sweeping all the trash under the carpet and printing money—the reality will catch up with you. The reality is certainly catching up with the US. After wasting all that stimulus money and bloating their deficit, the US government found out they have to modify our quarterly GDP growth to anemic levels—the lowest, in fact, since the Great Recession. I don’t believe there is one single thing they can do to get the economy growing again. They just have to be patient and accept that there will be little to no growth for many years to come. There was so much fluff in the economy leading to the global financial crisis that the adjustment will take a long, long time. Companies are not hiring because they can’t afford the high salaries people have gotten used to, and people are remaining on unemployment because they don’t want to downgrade their pay level. But eventually they will have to. The Internet and technology is making geographical differences irrelevant and the big pay gap between developed and emerging countries will shrink, only this time, the developed world has to adjust down, more than the developing world adjusting up.
Mr. Bull: How can one not get all worked up with all the shenanigans we have seen going on inside Washington D.C., which is ever so isolated from the real US and the real world? Yes, the US will be going through a period of introspection where priorities will have to be rearranged, and Europe and some emerging countries such as China and Brazil will have to carry the global economy on its collective shoulders. The economic powerhouse of Europe—Germany—is running in high gear and excuse me if I get a little excited. The best example is the German car industry. Daimler has announced that in 2011 they will be building and selling more cars than ever before in their history. Even the US will benefit because Daimler’s plant in Alabama will increase its capacity by almost half in the next couple of years. Where do they think they will sell these cars? Right, in the good ol’ US of A! Do they know something that you or the army of the current naysayers don’t know? Whose treasury bonds will countries with huge surpluses such as China buy? Zimbabwe’s? Don’t think so. There is a lot of pent up consumer demand in the US that is waiting to break into the open once economic circumstances appear to be a little better. Even in this more-than-disastrous summer, consumer confidence went up. Lowest growth since the Great Depression? I think you should check your numbers again. Keep your unfocused eyes on the automotive and airplane market. These two sectors will show the way out of this morass. Don’t worry about the US, though. As Churchill once famously said, “the Americans can always be relied on to do the right thing—after they exhausted all other possibilities.”
Mr. Gloom: Let’s forget about the macroeconomic mumbo jumbo and talk about steel for once. North American mills are cutting production again, service centers are taking and shipping less steel, and also trying to reduce inventory. HRC prices came down from $45.00 cwt. to $32.00 cwt.—a $13.00 cwt. decline. Before we are done with the price decay, we will see another $5.00 cwt. decline at least. Long products, faring a bit better, haven’t seen a large price decrease but the prices weren’t too high to start with—but ask any rebar or wire rod sales person, and he will tell you the market sucks. There are hardly any imports coming in, but prices are still going nowhere. We are approaching a three month market lull now. Is it a normal seasonal nature of the business? Maybe. Or maybe we have one or two good months when customers replenish inventories, and take the rest of the year off.
I would also argue with you that there is any pent-up consumer demand—there’s none in steel for sure. Tiny inventories are good for the levels of end-use demand which have seemed to stagnate over many months. You also mention “massive” steel consuming sectors such as airplanes and automotive that will save the steel industry. Let me tell you something: There is no recovery without a serious comeback of construction and construction has been stuck at its lowest historical level for the last three years. It’s sad but it’s the reality today. Get used to it.
Mr. Bull: Why not talk about the steel market, indeed? You get all flustered about the hot rolled coil prices that have dropped quite a bit lately. Don’t forget that they had also increased to an unreasonably high level only a couple of months prior. The flat rolled market is a larger one than long products and mills cannot manage the output as nicely as the producers of rebar, wire rod and structurals. However, steel demand is bound to strengthen since a key industry—automotive production and sales—is looking at a strong rebound just about everywhere in the world. So why didn’t the prices for long product drop just as precipitously as they did for flat rolled? The mills are managing it better by curtailing the output and their customers are happy to oblige because they order on a monthly basis anyway, keeping their inventory levels low. In the end, the macroeconomic mumbo jumbo that you so obviously detest will turn around the US economy in general and the steel industry in particular. The good old resilience of the US economy has been missing in action for a while but it’s not quite dead yet. In fact, fortified with a huge amount of accumulated earnings, American corporations are on the brink of unleashing a huge investment program. They just need to regain a bit of their confidence, which will come when the American legislative and executive branches have exhausted “all other possibilities” and do the “right things”—just as it was predicted a few decades ago by that wise English statesman you mentioned.
SX:At present, the actual transaction prices for main steel products are tending to increase, but under the influence of the price relation of each kind of steel product, the uptrend seems not so active, and it also illustrates that the market has not yet entered into a firm rising trend. Due to the continuous upticks of construction steel prices in the Chinese domestic market, the advantage of higher production cost has already occurred. Prices have reached the level of previously record highs, so any further movement upward will probably be impeded. Therefore, the prices in the steel market will gradually stabilize. As for the markets of other products, they fluctuate between neutral and up, affected by the driving force of the construction market and the support of raw material costs. Once they lose the two advantages, the markets will be out of control. Considering that downstream demand is low, and export orders have decreased recently, a downturn will become apparent if the markets have only a few advantages and the prices are stable. However, spot prices of other kinds of steel (except for building materials) are still far away from the previous price pressure line. Thus, it is anticipated that the whole steel market won’t show a large movement, continuing to fluctuate slightly on the basis of such price levels. As a whole, under such a market situation, steel mills’ release of production capacity, adjustment of price policy and fluctuating steel futures prices will influence the operation of the market.