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CURRENCY Wall Street is sold on what a weak dollar buys for steel

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Despite some Americans fretting over the U.S. dollar's demise, the people who follow the steel industry's financial fortunes see little to worry about on that count—with the picture not so bad for service centers, either.

"One of the functions of a weak dollar is to first raise the price of steel but also raise the demand" at domestic steel plants, said Aldo Mazzaferro, steel industry analyst at Goldman Sachs Group Inc. in New York. "The guys who must compete with imports coming into the country get a greater market share, or they export more," he said, citing the decline in imports that traditionally accompanies a lower dollar.

Moreover, in contrast to the steel recessions of 1991 and 2001—and despite an expected 3- to 4-percent falloff in total demand this year, with automotive leading the decline along with some softness in construction—Goldman Sachs estimates that U.S. apparent demand will actually rise by the same amount due to the need to replenish an inventory drawdown last year that Mazzaferro pegged at about 9 million tons, or around 7 percent of the market.

And while service centers "sell into the final demand world," or the world of steel consumption, which this year is falling, they'll nevertheless be able to push their prices up "because there's no alternative" for their customers in the import market. U.S. prices—based on delivery costs and adjusted for currency—are the lowest in the world, Mazzaferro said, citing as an example the prevailing U.S. hot-rolled coil price of $650 a ton in January compared with a Black Sea price, including freight cost and currency adjustments, of $720 a ton.

For James Moss, partner in Pittsburgh-based First River Consulting, the current environment has "sealed the trend that started in 2004 when things started to pick up and service centers realized that their relationships with domestic mills were much more important than they had been in the previous 20 years."

U.S. exports of steel mill products rose more than 14 percent to 10.3 million tons in the first 11 months of 2007 from 9 million tons in the same period a year earlier, Moss said. This was compounded by the withdrawal of imports, which last year totaled about 25 million tons of finished steel products (not including semis) compared with 33 million tons in 2006.

At the same time, Moss points out that service centers are holding "modest inventories" that aren't likely to increase very much," agreeing with Mazzaferro that a repeat of last year's inventory selloff isn't likely.

Another fan of a soft dollar—with qualifications—is Charles Bradford, analyst at Bradford Research/Soleil Securities Inc. in New York. "Over the last 20 years, one of my big issues has been that whenever we had a strong dollar, that's when U.S. steelmakers were in trouble," he said. "But the converse of that is to their benefit, and now we have lower imports and a sharp increase in exports." But a dollar that's too weak also brings the danger of high inflation and higher interest rates. When it loses ground against the Brazilian real, Australian dollar and, to some extent, the Canadian dollar, this means higher costs for pig iron, coking coal and other steelmaking raw materials.

"People are looking at this thing way too simplistically," Bradford said of the currency equation. "In general, I'm a fan of the weaker dollar, but a big change could be highly detrimental." He pointed out that Japan's decision to allow the yen to fall steeply helped plunge that country into a decade-long recession. "But a gradual change in the dollar of 5 to 6 percent a year makes sense."

So far, the conventional wisdom that a more competitive dollar brings manufacturing work back to U.S. shores is supported mainly by anecdotal evidence rather than by an extensive body of statistics. But in the view of Moss—who cites, for example, U.S. energy and labor costs that are lower than in Europe—"there's no question" it's going to happen. This is due not just to relative currency values, he said, but to the United States' historical role as a country friendly to manufacturing.

"This is still a good place to make stuff," Moss said, noting that decisions to build plants in the United States, such as plans by Germany's ThyssenKrupp AG to construct a facility in Calvert, Ala., aren't made "just because they have a slab plant in Brazil" to supply semifinished, but because the United States is still a good place to operate a business.


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