Heady days return for US makers
C AN this be the same company? US Steel — the flagship of ‘‘ Big Steel’’ in the US, looked to be headed for the corporate scrapheap just five years ago, when it reported a loss of $ US420 million. Last year US Steel made almost $ 880 million in profits — in 2008, it is expected to rack up $ 1.8 billion, and push that beyond $ 2 billion in 2009.
From the dark days of 2002, the share price of US Steel has surged nine- fold to its current level of $ 180. Back then, between 1998 and 2002, cheap imports drove about 40 US steel companies — almost half of the industry — into bankruptcy and brought Big Steel to its knees.
But the industry consolidation and reduced capacity that followed this downturn was exactly what the steel industry needed. Then, when China’s astounding industrialisation kicked into gear, followed by the equally strong economic growth in India and the fastgrowing economies of the Middle East, steel was poised for a strong recovery.
The changes in the global steel industry since 2000 have been profound. Between 1970 and 2000 the industry was characterised by global over- capacity. Demand ran at about 800 million tonnes, and global capacity was about 950 million tonnes.
But since 2001 production has grown by more than 50 per cent.
According to the International Iron & Steel Institute, world crude steel production rose by 7.5 per cent in 2007 to a record high of 1.34 billion tonnes. 2007 was the fifth consecutive year that world crude steel production grew by more than 7 per cent.
Times have never been better for the steel companies,’’ says Daniel Fitzgerald, materials analyst at Sydney- based Global Value Investors. This seems counter- intuitive, given the record prices for the major inputs to the steelmaking process, iron ore and coal.
Iron ore and scrap steel have doubled in price in the last year: coking ( steel making) coal has tripled. The steel makers’ costs are going up, but steel prices are going up by more,’’ says Fitzgerald. Prices for hot rolled band steel, a widely followed benchmark, have nearly doubled from the beginning of last year to a record of more than $ 1,100 a tonne.
Demand for steel is very strong, largely driven by emerging markets, but developed markets are holding up quite well, too. The demand, for steel just continues to grow,’’ says Fitzgerald.
The US steel industry has fought off the flood of imports, aided by the weak US dollar, high shipping rates, and strong overseas demand — and has boosted exports to the point where some US steel buyers advocate taxing steel exports to help keep some US steel in the country.
It has been a stunning turnaround by the industry, and it is reflected by US investor sentiment on steel. The American Stock Exchange’s Steel Index, which is composed of steel stocks, increased an average of 49 per cent a year from 2003 to 2007, compared to the Standard and Poor’s 500 stock index’s average annual increase of just over 13 per cent during that period. So far this year, the steel index has climbed 25 per cent, while the S& P 500 is down 6 per cent.