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Our 2008 Forecast
(Based on forecast 2008/October 2007 Modern Metals)
Steel Service Centers
Hang on tight. This is our advice for 2008. It will be a tough year for companies that haven’t invested in diversifying their product lines – especially those that serve the markets predicted to be down. Aerospace, non-residential construction, energy, agriculture, defense and infrastructure markets are all forecast to be strong in 2008. Meanwhile automotive, residential construction, appliance and heavy equipment are expected to struggle. With this type of economy, no one can predict what will happen. There are a lot of hints, however. According to the Metal Service Center Institute (MSCI) activity report for 2007, service center inventories of steel and aluminum products have continued their year over year decline compared with 2006 levels. This is because shipments of metal closely parallel the economy as a whole – 12 months of consecutive declines in the U.S. and Canada. This underscores the weakness of the North American economy. Inventories are down as is demand. Service centers continue to reduce their inventories in relation to the reduced demand, but it continues to decline. One of the biggest concerns for everyone is price. Volatile pricing on carbon due to flat-roll and stainless products due to the price of nickel makes inventory management more challenging. Add to that the unexpected pricing of imports and the markets are continuously in a state of flux. Steel distributors are unwilling to speculate on the market which keeps inventory levels low and requires reaction time to be quick.
Structural Shapes
After a tremendous year for non-residential construction in 2007, look for the momentum to continue into 2008. There are 322,300 tons forecasted for use in New York alone in the next 36 months, the most notable being at the World Trade Center memorial site. Plus, 70,000 tons is estimated for a hotel in Las Vegas called the Palazzo, which is currently the largest steel framed construction project in the United States today. Also new seismic and homeland security regulations mean that buildings will be heavier in upcoming years.
The growing trend of environmentally friendly structures could be a particularly lucrative area in coming years considering how recyclable steel can be. About 95% of beams originate from recycled content. It is estimated that upwards of 15% of renovation construction will be made of recycled materials. Plus, the rise in alternative and clean energies means more opportunities for new steel applications. We have seen new companies in solar power and wind power pop up all over the country providing new markets for steel.
For some applications, infrastructure will be a potential boon as the Minneapolis bridge collapse should put a greater political influence on restoring the nation’s 150,00o plus structurally deficient or obsolete bridges in the U.S. Commercial construction however is expected to be down in 2008 thanks in part to the continuing decline of the housing market. This reduction will affect the building of strip malls, schools, hospitals and other types of commercial projects.
Overall there should be a 3% increase of structural shapes in 2008 versus a 7% growth in 2007. Pricing should remain relatively stable as imports are not in plentiful supply. As long as the flat rolled coil material remains soft, so shall the cost of steel beams and channel.
Carbon and Alloy Plate
Perhaps the biggest impact on the plate market was made by the Department of Defense in its global war on terror. In 2008 the Department of Defense budget was increased by $5.3 billion to $147 billion. A big part of that budget was earmarked for the Mine Resistant Ambush Protected (MRAP) vehicles. For plate producers, the news of increased budget for MRAP’s was a very positive sign. More than 6,000 have been ordered with another 17,700 scheduled for 2008 and 2009.
But military applications are hardly the only bright spot on the horizon for plate producers. The push to become environmentally conscious will increase demand in farm equipment and railcar markets due to the upswing in ethanol production. Wind tower projects will require a healthy amount of plate as well as the green trend category.
While orders for military, bridge and environmental applications are expected to grow, there are segments that should be flat. These include tank fabrication, machinery and equipment and light construction equipment due to housing market. Overall consumption of plate is expected to be stable for the foreseeable future. Pricing should reflect this stability.
Tubular Products
The market for tubular products should see modest growth in 2008. This market segment has been greatly impacted by imports for the past few years. Imported tube from India, South Korea, Taiwan and China have greatly impacted U.S. manufacturers except for drawn over mandrel (DOM) tubing. This type of tubing is best provided through service centers because they can provide it on a just in time basis better than the mills. It is used primarily in the automotive industry as well as through fluid power, agricultural machinery, construction equipment, power generation and mining. Unfortunately the automotive market is expected to decline in 2008 which will impact the tubing requirements overall.
The market for hollow structural tube (HSS) should decline as well. In the past few years growth in this segment has been fueled by major construction projects, but this year many of those projects have been stalled. Unlike DOM, HSS is a market that China has jumped into with both feet. Just a few years ago China ranked behind Mexico, Turkey and South Korea in the U.S., but not now. The one problem they are currently facing is one of quality as there are many questions about their testing procedures.
Carbon Flat Rolled
Companies invested in carbon flat-rolled began 2007 with great optimism only to have their hopes dashed as they were hit with reality. The flat rolled market took hits from all directions and was greatly impacted by industry consolidation from both producers and distributors. There has been a greater growth in global supply than there has been in global demand which is a very big concern. This has kept pricing soft. This forecast will continue to exist at disproportionate levels through 2010.
The biggest reason for the imbalance is due to China. Currently China represents nearly 36 percent of global steel production. In recent years, China has switched from being a net importer of steel to a net exporter of steel. This has pushed a significant amount of steel into the marketplace, reducing steel prices globally and triggering a destocking cycle that has occurred over the past year. While the industry is going through a period of change, particularly globally, it is forecasted to be the same in 2008, with a moderate increase in demand. As with most of the forecasts presented, much depends on the overall economy.
Aluminum and Stainless Steel
The name of the game in aluminum in 2007 was consolidation. Some of the largest producers have banded together and with a shrinking forecast for 2008, the mergers were probably necessary. The three major markets for aluminum – construction, transportation and packaging are faltering so some producers of aluminum will be hurting. The market’s bright spot is aerospace which is soaring, and also the light weighting of automobiles. Engineers are working with aluminum to use as an alternative to steel. New automotive uses continue to surface as the material becomes more popular.
Other increases are in the office furniture industry, railing systems for stadiums and electrical segments. Aluminum extrusions have been a strong segment used for doors and windows, bridges and highway construction, mobile homes, store fronts and curtain walls. This segment, however, was down 26% from the year prior leaving smelters with shortening production lead times.
Stainless steel has a wholly different scenario than aluminum. The story in 2007 was a rapid ride up for the first half of the year following by a ride down in the second half of the year. The growth in 2007 was about 2.7% which was not the robust 17% growth seen in 2006, but is still considered solid. For 2008 growth is expected to be around 3%. The price of nickel is the major driver of the price swings that has characterized this product. The stainless steel industry has always found ways around the volatile and unreliable nickel market, such as crafting nickel-less grades of steel and substituting other alloys, such as manganese into the product. Fortunately 2008 should be more stable for nickel which will allow stainless steel providers to increase their inventories and provide some stability in pricing. Global stainless steel production continues to be strong as does demand.
Although the automotive sector is flailing, as is the appliance industry due to the housing slowdown, there are some bright spots in the industry. Aerospace has grown 30% since 2001 and looks to continue in that direction. Power generation looks to grow, with demand for electricity increasing by 2.4% through 2030. Oil and gas has potential growth on the horizon as a Gulf Coast pipeline is in the works and refinery capacity is expected to grow by 11% a year.
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