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United States Metals Report Q3 2009Product Type: Market Research ReportPublished by: Business Monitor International Published: July 2009 Product Code: R302-7414 Description BMI’s latest US Metals Reports warns that an early increase in capacity utilisation in the steel andaluminium industries could upset a tentative and precarious recovery and create a risk of over-supply,particularly in the event of a double-dip recession.US steel mills were on average operating at just 48.7% of capacity by end-Q209, down from 90.3% atend-Q208. Output for H109 was 26.52mn tonnes, a 51.8% year-on-year (y-o-y) fall with a capacityutilisation rate of just 43.7%. Given that integrated steelmakers need to run above 60% operating rates togenerate positive cash flow, majors were struggling. Meanwhile steel producers using electric-arcfurnaces have a more flexible cost structure with positive cash flow at run rates above 45%. Mini-millswill likely be the first to benefit from a recovery as they are able to bring back capacity more quickly thantheir integrated rivals. Domestic market prices of steel products continued to fall until May, but began to rebound from earlyJune. However, the market is still volatile and BMI does not see any indication of a tightening that wouldsuggest the beginnings of a recovery. Downstream demand in the US is still a concern. Meanwhile, byJune 2009 the US aluminium premium was at the highest level since November 2006. However, while themarket had bottomed out by Q209, improving demand did not mean that the aluminium market had gotgoing, with the increases in large part attributed to restocking downstream after substantial liquidation ofinventories rather than a solid and sustained increase in demand. Until there are positive signs of activityand longer term supply contracts, BMI remains sceptical about the market staging a recovery beforeQ409. By mid-2009, electric arc furnace producers appeared to be returning to profit, while integrated producerswere operating at a loss with capacity utilisation at under the 60% break-even point. Nevertheless, globalmajors are cautiously optimistic that production will increase in H209 from extremely low levels asrecovering investor confidence leads to an improvement in the market situation. Destocking in H109 ledto inventories falling to their lowest levels since 1983, and a sizeable amount of increased output will berelated to inventory building. The return of relative stability to the automotive industry is also grounds foroptimism, although sentiment cannot be said to be bullish (see The Future of the Automotive Industry). Rising confidence in the steel industry has prompted plans for restarting some facilities. US Steel mootedplans for a restart of at least one blast furnace at Granite City, Illinois in June 2009. ArcelorMittal alsoconfirmed it intended to restart the idled No.5 blast furnace at its Indiana Harbor Works. However, BMIcautions that perceptions of stronger demand may not reflect reality, with much of the new demandcoming from service centres seeking to replenish stocks. These concerns are shared by Nucor, which wasyet to announce any capacity restarts by mid-2009. Many service centres report that they are not planningfor any increase in output until September at the earliest. If steel mills fail to gauge the market accurately,the upshot will be a reversal of the price increases seen in Q209. There is a significant risk of a double-diprecession, which - if inventories rise too fast - could lead to further price volatility and another dip inweekly output below 1mn tonnes. Over the long term, few steelmakers expect a return to 2008 levels of output in the next five years.However, the situation is complex due to the uncertainties surrounding the scenario for the automotiveindustry following the bankruptcy filing by GM in June. BMI does not expect real demand for steel torecover before Q409. The federal government’s stimulus package had yet to result in new orders byQ209, while consumer and investment spending had not begun a recovery. The aluminium smelting industry will have a tougher time due to high energy costs and increasing globalcompetition as well as the country’s lack of bauxite. Even before the financial crisis began to take effect,over 30% of the US’s smelting capacity had been idled, although domestic output continued to climb upuntil mid-2008 and dependence on imports fell. BMI believes that some smelting capacity currently idledwill be permanently closed, which could include at least one of three smelters idled by Alcoa. On theupside, falling oil prices should enable smelting operations to negotiate lower electricity tariffs over themedium-term. By 2013, BMI believes total aluminium output will approach levels seen in 2008, butsecondary smelters will increase their share of output. Table of Contents
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