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
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
"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