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United States Metals Report Q3 2009
Business Monitor International, July 2009, Pages: 46
United States Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on the United States' metals industry.
US Metals Reports warns that an early increase in capacity utilisation in the steel and aluminium industries could upset a tentative and precarious recovery and create a risk of over-supply, particularly in the event of a double-dip recession. US steel mills were on average operating at just 48.7% of capacity by end-Q209, down from 90.3% at end-Q208. Output for H109 was 26.52mn tonnes, a 51.8% year-on-year (y-o-y) fall with a capacity utilisation rate of just 43.7%. Given that integrated steelmakers need to run above 60% operating rates to generate positive cash flow, majors were struggling. Meanwhile steel producers using electric-arc furnaces have a more flexible cost structure with positive cash flow at run rates above 45%. Mini-mills will likely be the first to benefit from a recovery as they are able to bring back capacity more quickly than their integrated rivals.
Domestic market prices of steel products continued to fall until May, but began to rebound from early June. However, the market is still volatile and there is not any indication of a tightening that would suggest the beginnings of a recovery. Downstream demand in the US is still a concern. Meanwhile, by June 2009 the US aluminium premium was at the highest level since November 2006. However, while the market had bottomed out by Q209, improving demand did not mean that the aluminium market had got going, with the increases in large part attributed to restocking downstream after substantial liquidation of inventories rather than a solid and sustained increase in demand. Until there are positive signs of activity and longer term supply contracts, the report is sceptical about the market staging a recovery before Q409.
By mid-2009, electric arc furnace producers appeared to be returning to profit, while integrated producers were operating at a loss with capacity utilisation at under the 60% break-even point. Nevertheless, global majors are cautiously optimistic that production will increase in H209 from extremely low levels as recovering investor confidence leads to an improvement in the market situation. Destocking in H109 led to inventories falling to their lowest levels since 1983, and a sizeable amount of increased output will be related to inventory building. The return of relative stability to the automotive industry is also grounds for optimism, although sentiment cannot be said to be bullish (see The Future of the Automotive Industry). Rising confidence in the steel industry has prompted plans for restarting some facilities. US Steel mooted plans for a restart of at least one blast furnace at Granite City, Illinois in June 2009. ArcelorMittal also confirmed it intended to restart the idled No.5 blast furnace at its Indiana Harbor Works. However, perceptions of stronger demand may not reflect reality, with much of the new demand coming from service centres seeking to replenish stocks. These concerns are shared by Nucor, which was yet to announce any capacity restarts by mid-2009. Many service centres report that they are not planning for any increase in output until September at the earliest. If steel mills fail to gauge the market accurately, the upshot will be a reversal of the price increases seen in Q209. There is a significant risk of a double-dip recession, which – if inventories rise too fast – could lead to further price volatility and another dip in weekly output below 1mn tonnes.
Over the long term, few steelmakers expect a return to 2008 levels of output in the next five years. However, the situation is complex due to the uncertainties surrounding the scenario for the automotive industry following the bankruptcy filing by GM in June. This report does not expect real demand for steel to recover before Q409. The federal government’s stimulus package had yet to result in new orders by Q209, while consumer and investment spending had not begun a recovery. The aluminium smelting industry will have a tougher time due to high energy costs and increasing global competition as well as the country’s lack of bauxite. Even before the financial crisis began to take effect, over 30% of the US’s smelting capacity had been idled, although domestic output continued to climb up until mid-2008 and dependence on imports fell. Some smelting capacity currently idled will be permanently closed, which could include at least one of three smelters idled by Alcoa. On the upside, falling oil prices should enable smelting operations to negotiate lower electricity tariffs over the medium-term. By 2013, total aluminium output will approach levels seen in 2008, but secondary smelters will increase their share of output.
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