Steel Industry Remains Downbeat

The mood among steel industry executives is getting darker by the day. Just when the sector seemed to have hit rock bottom, the worsening prospects for the world economy triggered by the terrorist attacks in the U.S. have dealt another blow to faint recovery hopes.

The industry generally welcomed talks that took place in Paris earlier this month, which were aimed at reducing the large overcapacity among steelmakers that has kept prices near to 20-year lows.

However, few in the $240bn-a-year business think the discussions - which put the onus on individual governments to talk to producers over the next two months about closing plants - will provide the industry with any short-term relief.

"The outlook for the industry has worsened considerably in the past few weeks," says Ken Hughes, an analyst at Credit Lyonnais.

"The orders that many steel companies hoped for in September have not come through, as demand in many markets has fallen away."

Because steel sells to so many industries, a broad downturn in the overall economy is always going to hit the sector hard. Nervousness in areas of manufacturing including vehicles, white goods and industrial plant has translated into delays in the orders that the industry was hoping desperately for after a weak first half of the year.

The situation was underlined by a warning last week from Usinor of France, one of Europe's biggest steelmakers, that it would move into an operating loss in the second half of 2001. The company also announced a steep fall in net income in the first half

There was further gloom from Nucor, which said weak prices and softening non-residential construction activity would lead to profits in the third quarter being lower than expected.

"The third quarter has seen a continuation of the most challenging U.S. steel market conditions in two decades. The anticipated second-half 2001 recovery in the economy and manufacturing activity has not materialized," the company said.

Against this, the discussions between governments and industry officials in Paris - brought about by the Organization for Economic Co-operation and Development - appeared removed from the real action.

At the meeting were officials from more than 30 governments, plus representatives of some of the world's biggest steel companies.

The talks were sparked by worries in the US that high imports in the past two years have exacerbated the trend towards low prices. Many steel managers in the U.S. blame inefficient plants in Asia, South America and the former Soviet Union, which they reckon have been pumping excess steel into the world market at below production costs.

U.S. government representatives welcomed the agreement hammered out at the meeting, which said that overcapacity was a problem, but left it to individual governments to resolve.

A second OECD meeting, probably in December, will re-examine overcapacity and report on suggestions by governments as to which plants in their countries are contributing to excess supply.

A U.S. government official said the OECD declaration was a "tremendous first step" to restoring better market conditions. But many in the industry doubt much further progress can be made.

"There is definitely overcapacity - but to identify where it is and agree on what constitutes an inefficient plant will require a lot of additional work," said Dimitri Goroshkov, sales director of Severstal, a large Russian steelmaker.

According to some onlookers, overcapacity - even if it can be defined - is not the real issue for the industry.

"It is a symptom not a cause," said Philip Tomlinson, steel director of CRU, a metals consultancy.

"The real issue is the lack of consolidation in the industry. This means there are not enough genuine steel multi-nationals with the strength to keep prices at higher levels. Steel producers are squeezed between large customers, which can force prices down, and big suppliers of raw materials [including iron ore and coking coal], which keep costs high."

The squeeze to which Tomlinson is referring is illustrated by forecasts in the US, where steelmakers have been further hit by the strong dollar, that underlying profits for the industry this year will fall steeply from the low levels of last year.

According to projections made this summer by World Steel Dynamics, a consultancy, average earnings before interest, tax, depreciation and amortization in the steel industry will fall to an average of just $13-a-ton, from $21-a-ton in 2000. The projection will almost certainly be revised down in the light of the bleak economic news of recent weeks.

For many steelmakers, 2001 will be a year they will want to forget. But many doubt 2002 will be much better. Financial Times.