Nerds of Steel

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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Goldman Sachs reported today that it believes the US economy will suffer a recession in 2008, and Goldman is not alone.  It seems everyone is worried about the impact of the credit crunch and high energy costs on US consumers.  So, what might a recession mean for shipments by steel producers in the US in 2008? 

There is clearly a correlation between GDP growth and steel demand.  In developed economies, such as the US, the rule of thumb is that GDP has to grow at a base line level or steel demand contracts.  In the US, the rule is pretty simple: If GDP grows by more than 2.5%, steel demand tends to rise.  Conversely, steel demand falls when GDP grows by less than 2.5%.  You can see this in the graph below.  (If the graph is hard to read, click on it and it will enlarge). 

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