Heady days re­turn for US mak­ers

The Weekend Australian - Review - - Steel -

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.

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