Signs Steel May Have Bottomed

A Wall Street Journal article published Wednesday (1/7/09) talks about recent efforts of steel producers around the world to open up select mills, in a sign that the market for steel may have bottomed.

From their mid-2008 highs, steel and iron ore prices have slipped 40% as a weakening global economy and financial crisis has slowed demand for cars, houses and other durable goods. However, there are many factors that suggest that this commodity, so heavily correlated to economic activity, may have bottomed and may gain steam in 2009.

Since the decline in global steel prices, producers have been quick to cut production. Several global steel/iron ore producers such as ArcelorMittal (MT), AK Steel Holdings (AKS), BHP Billiton (BHP) and Baosteel Group have cut 2009 production by 25-30%, hoping to stem further price deterioration.

Producers have been opening mills back up selectively, and although this suggests the start to a revitalizing market, in the near term it is probably a function of lower supplies rather than a pickup in demand.

In the 2nd half of ‘09 (2H09), prices for iron ore and steel will likely see upward momentum for two reasons. First, stimulus packages, particularly in China, will start working their way into the economy. This will promote economic activity and increase demand for steel/iron ore as the need for cars, infrastructure and housing picks up. Secondly, massive global liquidity injections into the financial sector in late 2008 should start to thaw credit markets in 2009. This will encourage investment, expansion and economic activity in both OECD [Organization for Economic Co-operation and Development] and emerging markets.

Coal will also be a benefactor of the pickup in demand in 2H09. Metallurgical coal is a vital part of the steel-making process and the increase in demand should push prices higher in the face of continuing supply constraints on a global scale. Being a swing supplier, U.S. eastern coal basins (Appalachia) should see prices head higher due to demand from Atlantic and Asian markets.

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