U.S. steel sector wary about post-clunkers demand
The 700,000 cars sold in the cash-for-clunkers program prompted U.S. automakers to boost 2009 production after a long period of inventory cuts, spurring North American steelmakers to restart idled mills.
Now that the clunkers program has wound down, the steel industry is unsure whether demand will stay high enough to absorb the additional output. So far, analysts are not seeing a U.S. economic recovery robust enough to sustain the pick-up in steel demand.
“As a result of the cash-for-clunkers program as wells as some restocking throughout the automotive supply chain, there has been an increase in end-user demand. And there is very little steel inventory at present,” said Luke Folta, steel analyst at Longbow Research.
By late August, some steel producers had already closed order books for October and are now working to fill them. But analysts are waiting to see whether the increased production will still be needed after the next few months.
“Aside from automotive, and a few other smaller pockets, there hasn’t been a real pick up in end-user order activity. There’s a meaningful amount of capacity coming online and we’re somewhat concerned that it may have gone too far,” said Folta.
Europe-based ArcelorMittal, the world’s largest steelmaker, and U.S. Steel, said late last month they were restarting production at two blast furnaces each in the U.S. Midwest and Canada in response to improving demand.
Adding production capacity mostly to accommodate increased car output will boost U.S. steelmakers’ operating rate to 60 or 70 percent of capacity, analysts said.
“It doesn’t get you all the way back, but the industry is running at a 55 percent operating rate (up from about 45 percent) and it is justified by what we have seen in real consumption over the last several months,” said Charles Bradford, partner at Affiliated Research Group good credit score.
A major drawdown in steel service center inventories, a process that kept steel mill capacity near a 45 percent operating rate for the first seven months of 2009, has meant consumers now need to order steel just to maintain current levels of output even if the economy stays flat.
“The absence of inventory destocking has been the most significant driver of the increases in steel production and mill shipments over the past couple of months,” said Folta.
With inventories extremely low, it is unlikely steel output will fall again to this year’s low levels. But it is also unlikely to surge dramatically, said Anthony Young analyst on the Dahlman Rose metals team in New York.
Shipments from service centers, the middle men between raw steel producers and end users like manufacturers of appliances, cars or computer boxes, have stood fairly flat for months.
In July, steel mills saw a 15 percent increase in orders even though actual sales at service centers barely rose.
“I think it’s fair to say that the bulk of inventory destocking is behind us. If you look at stock inventory levels at the distribution level they are very low,” said Folta.
About 50 service centers indicated in the latest monthly Longbow survey that they are not carrying any excess stock.