Steel Industry Fired Up, But Warning Clouds Ahead

Nation's steel capacity utilization is on the rise, but cost pressures on scrap and ore could create new set of problems.

Just 12 short months after a seismic contraction, the steel industry is back -- and it's hotter than a freshly poured ingot. Demand has skyrocketed both in the U.S. and worldwide, pushing steelmakers to between 70 to 75% capacity, nearly two-thirds busier than at the start of 2008, when operating rates were roughly half that mark.

But that upturn in demand hasn't led to buoyant optimism. Far from it. Last week, when CEOs from some the largest steelmakers in the U.S. met at the 118th annual meeting of the American Iron and Steel Institute in Boca Raton, Fla., much of what was expressed was skepticism that the good times will last.

"We are seeing in some sectors a much stronger uptick," said Dan DiMicco, CEO of Nucor. "Automotive is one, and in the last quarter or so, appliances and the energy sector. We are optimistic, but we are cautiously optimistic."

While many sectors of the economy have enjoyed some of the benefits of the government stimulus package, it hasn't necessarily impacted the steel industry, said Jim Wainscott, chairman of AK Steel Holding. Much of those funds went toward spurring infrastructure building, but construction in both residential and commercial building remains sluggish.

Wainscott touched on one of the industry's more troubling signs, which is the "substantially higher costs" domestic producers are facing for imports including scrap steel, coke, metallurgical coal and iron ore.

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So while the nation's steel capacity utilization continues to rise, the issue of price is becoming a more compelling issue -- and a possible point of contention.

"The big concern I see is there are going to be some issues in the fourth quarter," says Nick Sowar, global steel industry analyst for Deloitte & Touche. "I think there is going to be a breaking point where the prices are too much. Customers may balk at the continual price increases, irrespective of where scrap prices and iron ore are. That's the challenge."

So too is the role of China and the pressures it is asserting on the worldwide steel industry, said Nucor's DiMicco, through mercantilist trading practices and violations of promises it made in order to become a member of the World Trade Organization.

China's currency, he said, is undervalued and gives its exporters a 40% subsidy on shipments.

"This has led to a devastating global trade imbalance that contributed significantly to the world financial meltdown and to the Great Recession of 2008 and 2009," said DiMicco. "From behind a currency wall of protection, China has promoted its own jobs, investment, production and exports at the expense of manufacturers in the U.S. and other nations."

DiMicco offered several strategies that he believes could nurture domestic manufacturing, including creating a long-term national energy policy that emphasizes clean, affordable and abundant domestic sources of energy; greater enforcement of trade policies to level the international playing field; adopting a global approach to climate change; and investing in upgrading the national infrastructure.

"We recognize we're in a war," DiMicco said. "We've put on our battle gear and we're in the fight for the long haul. There's just too much at stake to shy away from the challenge."

TAGS: Trade
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