2009 will be a difficult year for the global steel industry. How bad it gets and what happens on the other side of the global slowdown is impossible to predict. But there is no shortage of observers willing to paint a bleak picture. In a recent article in the Financial Times, Peter Marsh summed up the views of a number of analysts. Not surprisingly, the general consensus is decidedly negative. Here are a couple of excerpts: “Global steel production could easily plunge by 10 per cent or more next year” and (I’m paraphrasing here) “it could take 4-5 years for global production to return to the levels achieved in the first half of 2008.”
While these projections may prove to be right, they seem overly pessimistic to me. First of all, the latest forecast of global economic prospects published by the World Bank and discussed by James in a recent post, calls for the world economy to grow by 1.9% (PPP basis) in 2009. As I’ve argued in the past, there is a correlation between global GDP growth and the change in steel demand. If we plug 1.9% GDP growth into the model, the predicted decline in steel production for 2009 is -3% not -10%.
This is not to say that 10% is impossible, especially given the production cuts that mills have already made, but it does call into question whether a 10% reduction in global steel production is reasonable. Since the Second World War global steel production has never fallen by double digit levels in a single year. It came close in 1975 and 1982 when it fell by over 8%, and it has fallen on a cumulative basis by more than 10% over several years, but it has never fallen by 10% in a single year.
There is no question that these are unprecedented times and anything is possible, but I wouldn’t just accept what appears to be an emerging consensus that a double digit decline is inevitable. Don’t forget that developing economies, which now account for close to 50% of global GDP and whose demand for steel typically grows faster than GDP, are still projected to grow 4.5% next year. They have been driving the global growth in steel production and will continue to do so in 2009.
The second main theme that emerges from the FT article is that it might take 4-5 years to get back to the production level achieved in the first half of 2008. My response is the same. This seems overly pessimistic. The underlying growth of global steel production has been close to 6% per year for the last decade, driven by the emerging economies entering the steel-intensive phase of development. This process will not stop. It may slow for a time as the world economy deleverages and replenishes the capital base of the global banking system, but governments are responding aggressively to stimulate economies. Don’t be shocked if steel production in 2010 is as high as 2008. 2009 will be a difficult year no doubt. But let’s not spoil a difficult year by getting too enthusiastic about just how difficult.
{ 2 comments… read them below or add one }
Mr. Taccone, I read your posts religiously and gain a good deal of knowledge from your insights. Thanks for sharing your view that some are just being overly pessimistic.
The only caveat I have to your reasoning for steel production to be closer to -3% rather than -10% is that you assume production in 2008 was ideal and not inflated.
This means that all the steel produced for the speculative offices in the US which now sit vacant, was not only needed, but will be minimally affected. Auto sales were 13 million, down from 16 million and many estimates peg these at 11-12 million for 2009…meaning steel production for autos was too high in 2008 and will fall in 2009 as well.
Globally, all the rebar and beams for the construction boom in the Middle East was not only needed, but will also be repeated with only a slight slowdown. I am leaning to the nasty numbers because of these issues noted here, but also in every economy around the world.
Again, I enjoy your posts as well as your presentations at conferences. Keep up the good, intriguing work.
SI
Let’s hope it is not as bad as predicted…