Have we hit bottom? In the
weeks leading up to the Christmas holidays, that was the
question on the lips of many in the North American industry.
That it was even being asked could be viewed as a sign of
progress from September through mid-November, the market
direction was unequivocally down.
That seemed to change in late November.
As always, the scrap market provided the first indications of a
potential change. A flurry of export deals, followed by an
upturn in prices for some grades in the east and Midwest,
halted and-at least temporarily-reversed the collapse in
prices. That fed through to the steel markets, with hot band
recording a $20-per-ton increase in early December, the first
uptick since the heat of late July; it was modest, perhaps, in
light of the massive price hikes (and almost as massive
declines) that 2008 will be remembered for, but welcomed by
mills and even many buyers all the same.
The base metals markets saw a similar
story, with floors seemingly emerging under copper and other
exchange-traded metals after huge price collapses (the
exception being aluminum, which continued to decline even as
other base metals found some stability).
It would be brave, or foolhardy, to see
those hints of price upticks as evidence of any kind of
sustained recovery, however. Proponents of the commodity
super-cycle theory (who are unlikely to have been deluged with
good wishes during the festive season) liked to point out that
what made the recent bull market different from those of the
past was that it was driven fundamentally by demand, mainly
from China and other emerging economies. And while the bull in
question is dead, or at least in the midst of a bear-like
hibernation, that analysis holds true.
The problem with the so-called recovery
is that demand shows no signs of picking up. The economy hasn't
collapsed, although it came close, and so steel mills, service
centers and metal manufacturers that have worked through
inventories now need to buy, albeit at far lower levels than
previously. That could draw new material into the market, which
risks capping or reversing any recent gains in prices.
There are two separate things happening
which will determine how long it will be before the market
starts to see a sustainable recovery. The first is the
industry's reaction to the downturn, which is measurable and
controlled; the second is the extent of the downturn itself,
which is not.
Steelmakers in North America are
operating at less than 50 percent of capacity, down from 90
percent in August. Globally, steel producers from ArcelorMittal
downwards have cut output by up to 35 percent, including those
state-supported mills in China that were long thought to be
unable to respond to market signals. Companies in the steel
industry, including those in the United States, reacted much
more quickly to the drop-off in demand than those in some other
industries, and this might enable them to recover from the
downturn more quickly as well. Global mining houses such as Rio
Tinto and BHP Billiton, for example, waited until early
December before announcing big production cuts, despite spot
prices for raw materials slumping months earlier. In the
aluminum market, Alcoa began retrenching in September, long
before many of its rivals.
But regardless of whether companies
made cuts in the fall or in the depths of winter, their destiny
is to a large extent out of their hands. Financial markets seem
to have stabilized, at least in comparison with the horrendous
declines of September and October-a trillion or more dollars of
government money will have that effect-but there's no light at
the end of the tunnel for the real economy. Business confidence
is at painfully low levels, the housing market remains mired in
a downturn and credit remains hard to come by. Critical
consuming markets for metals, such as construction and autos,
are looking at an extended slump, and the demand situation
internationally is, if anything, looking even worse.
President-elect Barack Obama's
ill-defined plan for a massive infrastructure stimulus is a
source of some optimism, but it will be months before any real
impact from the proposal is felt on the ground. Until it is-and
until demand returns-any rebound in metal prices will only be a