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Early Christmas gift might prove to be a lump of coal

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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 false dawn.

KEVIN FOSTER

Managing editor


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