Niche markets face their ups and downs, and
the downs can become pretty severe in trying economic times.
The cold-rolled motor lamination (CRML) sheet market is a prime
A combination of factors-the weakness of the
U.S. dollar, a lagging residential construction market and a
shift in operations offshore-is driving the niche market to
shrink from its already small standing, according to analysts.
The exact size of the market is somewhat hazy.
"It used to be a market of about 1 million
tons or so," Patrick McCormick, joint managing partner at World
Steel Dynamics Inc., Englewood Cliffs, N.J., said. "But because
of the international play-the weakness of the dollar-you're
seeing the market shift to the point where it's no longer a
1-million-ton market in the U.S. It's about 30 to 40 percent of
that. I'd say 600,000 tons per year is a reasonable number, and
it's getting smaller."
CRML's most popular use is in household
appliances, but it also is used in some industrial
applications, like large motors and transformers.
With residential construction lagging,
appliance business hasn't exactly been booming. And the
near-term prospects for residential construction aren't bright.
U.S. housing starts sank to a seasonally adjusted annual rate
of 1,006,000 units in December, down 38.2 percent from
1,629,000 units in the same month a year earlier, according to
U.S. Census Bureau data, and down 14.2 percent from 1,173,000
units in November 2007 following a 7.9-percent decline from
1,274,000 units in October.
"It's a market very dependent on housing
because of all the motors in appliances, HVAC (heating,
ventilation and air-conditioning) and others," McCormick said.
"It's also a very cost-intensive product to manufacture. When
you make the laminate to make the product, often times you end
up throwing 30 to 40 percent of the material into the scrap
bin. It's a very cost-sensitive product for steel."
Those factors contribute to what some see as
more difficult times ahead for CRML. Mark Parr, steel industry
analyst at McDonald Securities/KeyBanc Capital Markets Inc.,
Cleveland, said the weak U.S. housing market shows no signs of
strengthening soon. "To the extent that the market is impacted
by residential construction, you see housing starts at, what, a
15-year or 17-year low? That's certainly not a positive sign
for the market," he said.
The National Association of Home Builders
(NAHB) apparently agrees with that assessment. "The December
report on housing starts and building permits was fundamentally
weak, showing that the housing sector exerted a strong drag on
economic growth throughout the final quarter of 2007," the NAHB
said in a Jan. 23 report. The group said its recent builder
survey measures also were quite weak, with residential
fixed-investment housing production bound to be a major drag on
gross domestic product growth in the first quarter of this
However, "builders are anticipating a time
when market conditions will support an upswing in building
activity," NAHB chief economist David Seiders said in a
mid-January statement. But that's unlikely to come until the
second half of 2008.
The U.S. economy is a key swing factor. Some
were declaring in early January that the U.S. economy was
already in recession, while others had it teetering on the
edge. "NAHB believes that the economy still is in the black,
and we believe that recession will be narrowly averted in
2008-our recession probability is 40 percent," the group's Jan.
23 report said.
Yet while there are major hurdles to
overcome, particularly with the residential construction drag,
the picture isn't entirely bleak. One upside might lie in the
fact that even though housing starts are down, many people are
choosing to remodel their homes. As they do, the need for power
tools and, at times, new appliances to go into remodeled
dwellings would seem poised to increase.
"It's kind of a generally held belief that if
you are not buying a new house, you are fixing up the one you
are in," Parr said. "So to that extent, if people are buying
new appliances that might offset the reduction in new
construction activity somewhat. The central issue really is the
economy. How do people feel about their job and their earnings
Pricing also could be another upside for
CRML. Steel prices in general are rising, and the
semi-processed CRML closely tracks cold-rolled sheet, which was
selling at about $750 a ton on the spot market for March
delivery, up about $150 a ton since late 2007.
"We're pretty negative on automotive and
appliances-in general on consumer durables more so than the
industrial side. We feel that because of the inventory drawdown
at the service center level in 2007, you will see apparent
demand rise. The mills will see stronger demand from service
centers replacing inventory taken out last year," Aldo
Mazzaferro, steel industry analyst at Goldman Sachs Group Inc.,
New York, said. "But the service centers will have trouble
selling to the end-use markets because of weakness in consumer
durables. That's why we think things like auto and appliances
will suffer a little. But prices will go up. Buyers will have
to start buying because inventory levels are low and there is
no import out there. Buyers have to buy even in a recession to
keep their inventories from dropping. They're going to have to
step up buying," he said, adding "I see there being a big short
squeeze. I'm very bullish on pricing."