Tepid but real recovery in both the U.S. economy and the domestic steel industry should continue into 2014 as long as the federal government doesnt throw a big monkey wrench into it, according to Thomas J. Gibson, president and chief executive officer of the American Iron and Steel Institute.
During the Washington-based trade associations mid-September press teleconference on the state of the U.S. steel industry, Gibson told reporters that keeping the federal government operating and passing legislation to raise the nations debt ceiling were critical to growing the economy and maintaining demand for steel and other goods and services even through this rather tepid economic recovery.
While Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., said the effect of the government shutdown was somewhat intangible, with the biggest impact being a lack of clarity about the future, John Anton, manager of steel services for IHS Global Insight Inc., said it is generally accepted that each week of a government shutdown shaves 0.2 percent off gross domestic product growth.
If people dont have a job or dont have the confidence that they will keep their job, they wont buy cars or refrigerators and the companies that sell those products wont make capital improvements, Anton said.
Worse than the shutdown would have been a default by the U.S. government on its obligations if the debt ceiling hadnt been raised, Gibson said. The credit of the United States government is something that we shouldnt risk.
Tax reform also will be a critical issue for the manufacturing sector in general and the steel industry in particular, Gibson said. Its possible that the House Ways and Means Committee or the Senate Finance Committee could develop some kind of tax proposal, whether they mark it up or not, he said.
In judging such proposals, Gibson said the AISIs measuring stick is whether it reduces the effective tax rate on manufacturers. The grand bargain seems to be to lower the rate, broaden the base and to eliminate some of the reductions in the credits that exist in the tax code that benefit manufacturing, especially capital-intensive industries, he said.
And there are other concerns. An AISI letter sent to U.S. Trade Representative Mike Froman and Treasury Secretary Jack Lew in September, which was signed by 60 senators, called for strong and enforceable disciplines against currency manipulation in the proposed Trans-Pacific Partnership and future trade pacts, given that China allegedly continues to subsidize its steel industry, manipulate its currency and transship its products through third-party countries to avoid U.S. duties. A similar letter signed by 230 congressman was sent earlier in the summer.
All of this is happening against the backdrop of a 4.1-percent decline in domestic steel shipments this year compared with the first seven months of 2012. We are expecting to see some better performance in the second half of the year at least on a year-on-year comparison, Gibson said, if for no other reason than the third and fourth quarters of last year were so weak. As a result, he said, the AISI is predicting that 2013 steel shipments will be up about 0.8 percent and there will be an even better performance next year as long as the economy continues to recover.
So far, he said, steel market sentiment remains positive, the automotive market remaining a particular bright spot, as it has been for a couple of years.
Sales are cruising and production is going like gangbusters, with domestic automakers (both the traditional Big Three and the Asian- and European-owned transplants) running flat out at rates that are exceeding previous expectations, said George Magliano, senior principal automotive economist at IHS Automotive. He expects 16.2 million cars and light trucks to be produced in the North American Free Trade Agreement region in 2013, up from predictions of 15.8 million vehicles earlier in the year and well above output of 15.4 million last year and a low of 8.6 million in 2009 at the peak of the Great Recession. He also expects North American auto output will continue to rise in the coming years, matching the 2000 peak of 17.2 million vehicles by 2015 before climbing to about 18 million in 2020.
The steels that we are bringing to market now are different than the steels that were going into autos five years ago, including more next-generation advanced high-strength steels, Lawrence Kavanagh, president of AISIs Steel Market Development Institute, said. The investments by our member companies to deliver these new materials are also on the rise to support the demand in the market.
One big challenge, however, is the overcapacity of steel globally, especially in China. That is causing disruptions in the market, Gibson said. Relative to the rest of the developed world, the United States has the healthiest economy. We also have the strongest steel market. This is making the United States somewhat of a target with about a 23-percent import market share, which is a high number. Steel imports surged about 18 months ago and have since maintained their high level. That has definitely been an issue.
The steel import issue, however, has been very product-specific, Plummer said, noting that while imports have clearly been an issue with steel concrete reinforcing bar and oil country tubular goods (OCTG), two products for which the domestic mills have recently filed trade cases, they havent been so across the board.
In fact, while finished steel imports in August were up about 9.8 percent compared with July, according to U.S. Census Bureau data, year-to-date imports were down around 7.3 percent vs. the first eight months of 2012.
Rebar and OCTG were two big contributors to the month-on-month rise. Rebar imports jumped 117.4 percent in August and were up 12.7 percent year to date, while OCTG imports were up 61.6 percent for the month but down 16.8 percent year to date. But imports of hot-rolled bar were down 31.1 percent for the month, wire rod imports fell 21.2 percent and heavy structural shapes dipped 20.7 percent.
Domestic rebar producers Nucor Corp., Gerdau Ameristeel U.S. Inc., Commercial Metals Co., Cascade Steel Rolling Mills Inc. and Byer Steel Corp. filed a trade complaint Sept. 4 against Turkish and Mexican rebar imports, and three weeks later the U.S. Commerce Department officially launched a dumping and subsidy investigation.
The petitioners said that rebar imports from Turkey and Mexico, which accounted for 17 percent of the U.S. market in the first half of this year vs. 7 percent in 2010, jumped 68.4 percent to 841,294 tonnes last year from 499,556 tonnes in 2011 and were nearly double those in 2010. Plummer said that while it is too early to determine whether the trade case will be successful, if it is the impact could be significant.
He noted that the domestic rebar market has been negatively impacted by a decline in public works construction, which is down 5 percent this year after a 2.9-percent decline in 2012, and a 2.3-percent drop in nonresidential construction from January through July. As a result, most rebar mills capacity utilization rates are in the low- to middle-60-percent level at best, Plummer said, so there is ample excess domestic capacity to meet U.S. demand even if nonresidential construction shows greater signs of improvement next year, as many predict.
Anton said that while he is a big believer in free trade and generally a naysayer about trade complaints, in this case he believes the time has come for the U.S. steel industry to file Section 201 action. One country (China) has been doing all the wrong things and it could take the rest of the world down with it, he said. Sometimes the domestic steel mills problems are of their own making, he added, but that isnt the case this time.
It is very possible that more steel trade cases will be filed, Anton said. But the problem with trade cases is that they go on longer than they need to. While protection is only needed for perhaps two to three years, the duties will be in effect for five to 10 years.
Gibson said there was one good piece of news in mid-September: the House Transportation and Infrastructure Committee unanimously approved the Water Resources Reform and Development Act and sent it to the full House for a vote. The Senate passed its own water resources legislation in the summer. This bill increases investment, prioritizes infrastructure needs, reduces red tape and is long overdue as it has been seven years since the water resources bill was enacted and the steel industry has felt the impact, he said.
Passage of a water resources bill is a necessary step to get U.S. Army Corps of Engineers projects moving forward, he said, noting that a recent report by the American Society of Civil Engineers said that the aging ports and waterways infrastructure was responsible for delays costing $33 billion in 2010 and are expected to increase to nearly $49 billion by 2020.
Gibson said that the reforms contained in the House legislation would help to reduce congestion at ports and minimize logistical delays and compounded expenditures, which are all important measures for steel producers and their suppliers and customers, who depend on timely deliveries.
We are also at the one-year point of the short-term surface transportation bill being up again for reauthorization, Gibson said, calling for a longer-term measure this time around.
Anton agrees that a longer-term bill, preferably a five-year measure vs. the two-year funding now in effect, is needed. Infrastructure projects tend to be long term in nature, so you need to have long-term funding for them, he said.
It is regrettable that infrastructure funding keeps on being put on the back of Congress priority list, Plummer said, maintaining that there is a clear and significant need for infrastructure spending as it could be one of the best things the government could do to stimulate job growth and enhance productivity. But infrastructure funding is discretionary spending and construction companies are largely regional, so there is a lack of a strong constituency.
Another issue is that the federal fuel tax, which traditionally funds the highway bill, has remained unchanged since 1992 at a time when vehicles are becoming increasingly more fuel efficient, Plummer said.
Funding will be an ongoing problem, Anton said because it will be difficult for the government to find an alternative source of funding during a time of deficit constraints. People feel that all taxes and regulation is bad. There isnt a simple solution.