Nerds of Steel

In response to a presentation I posted recently on this blog, I received the following questions from an investment firm based in Switzerland.

1) Is your indicated correlation also applicable to Europe only, i.e. could it be used to forecast steel demand in Europe?

2) Europe is expected to grow below 2,5% real GDP for the next decade.  So your correlation would indicate falling steel demand for the next years, even beyond the current recession.  Is that realistic?

3) What sources could you recommend for historical data and forecasts on prices and demand?

I’ll take a stab at addressing each of the questions but would like to encourage our readers, especially those with expertise on Europe, to contribute as well via comments on this post.

The correlation between GDP and steel demand does appear to be applicable to Europe, which means GDP growth projections have some explanatory power when thinking about future steel demand.  As can be seen in the graph below, steel demand among the EU 12 grows when GDP in the region grows by more than 2%, and falls when GDP growth is under 2%.

The correlation between GDP and steel demand growth is not as strong in Europe as it is in the US, which is probably a function of the fact that the EU (as defined in the graph) is comprised of 12 countries and there are exchange rate issues involved in converting GDP to a single currency. However, there is a strong enough relationship to suggest that GDP growth below a threshold level of 2% is unlikely to be associated with growing steel demand.

The second question asks whether steel demand in Europe could fall for several years, beyond the current recession, if GDP growth remains below the threshold level of 2.0%.  The short answer is I don’t see why not, if we are defining Europe as the EU 12.  This group of countries has already reached the stage of economic development when steel demand growth tends to stabilize, and it has a shrinking population and a relatively high manufacturing cost structure when compared to some of the new EU members.

For the newer EU members, especially those in central Europe, we would be surprised if they experienced years of stable or declining steel demand.  Instead, we expect steel demand growth in central Europe will resume once the current global recession abates.

The final question has to do with sources.  We have several links on this site to sources of information on European and global steel statistics.  Under the data section we have links to a number of steel industry associations, including the World Steel Association, formerly known as the International Iron & Steel Institute, and Eurofer, the European steel industry association.  Both provide historical data on steel demand in Europe.  The WSA provides a short-range outlook and occasionally a medium-term forecast.

The best sources of pricing data for Europe are Metal Bulletin, Steel Business Briefing, and the Steel Index.

Hope this helps.

According to newly released data by the World Steel Association, global crude steel production slowed by about 7% from September to October. Steel output is higher in 2008 than in 2007 by about 2.9%.

But the more interesting analysis is to explore how the data reflects the global industrial slowdown in different parts of the world economy. Global crude steel monthly output in 2008 peaked in May. Since then, monthly production has fallen about 20MT or 16%. But the decline has not been shared equally.

Russia and Ukraine represent about 6% of total crude steel production, but their decline (very export and semi-finished intensive) has been 37% or 19% of the total decline. China’s monthly crude steel output has declined 22% since May or 52% of the global decline. China represents about 36% of global crude steel production.

And the developed world’s (North America, Europe, Japan etc) monthly output has declined 10% since May or 25% of the total decline. But even here there is significant variation. The US and Canada have declined 16% while the EU-27 declined only 10%. Despite these variations, or may be because of them, it looks like the global steel production system is respondingly quickly and appropriately to the rapid shift in demand expectations. All the data for this analysis is contained in our spreadsheet below. Feel free to share your own insights in a comment.

US long products imports licenses grew marginally to 241,000 short tons in October from 233,000 tons of actual imports in September. As predicted in an earlier post, rebar licenses declined (to 37,000 tons from 58,000 September actuals) and wire rod licenses increased (to 143,000 tons from 97,000 September actuals). China accounted for a big portion of the increase in wire rod licenses with license applications going from 14,000 tons in August to 8,000 tons in September to 58,000 tons in October.

Financial results for Q3 2008 have been reported by ArcelorMittal, Gerdau, Gerdau Ameristeel, and Ternium. Operating income per ton and EBITDA per ton can be found on the Nerds of Steel earnings spreadsheet.

Press releases announcing quarterly results for each company can be found by following the appropriate link below.

ArcelorMittal’s Q3 results.

Gerdau’s Q3 results.

Gerdau Ameristeel’s Q3 results.

Ternium’s Q3 results.

Data just released by the AISI shows raw steel capacity utilization at 67.3% during the last week of October, down from close to 90% a couple months ago.  How does utilization below 70% compare to previous recessions?  And how long might it last?  A review of historical data is always a good place to start when pondering such questions.

The graph below shows annual capacity utilization for the US industry back to 1915. Utilization dropped below 70% only four times: During the depression of the early 1920s, in the great depression of the 1930s, in the period of global economic slowdown between 1958 and 1962, and finally during the severe recession of 1982 and its aftermath. In other words, history suggests that sustained periods of steel industry capacity utilization below 70% are rare, but not unheard of, and occur only when the US and global economies are in severe recession.

Though we do think we’re in a recession in the US, we don’t believe we’ll see a prolonged period of utilization below 70%. There are two reasons for our relative optimism.

First, this global downturn is not expected to be as severe as some we have experienced in the recent past, for the reasons cited in this post by fellow nerd, James Moss.

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