The headline number, a negative GDP reading in the first quarter, is obviously worrisome. However, the overall economic picture isn’t as problematic for the steel industry, said Ping Liang, lead analyst for strategic marketing for ArcelorMittal at the AWMI Chicago Chapter meeting in May.
The first-quarter downturn was driven by a few factors, she said, most notably the trade deficit, though the war in Ukraine and the Chinese COVID lockdowns also contributed. In contrast, the main driver of economic growth in the U.S., consumer spending, remained OK if challenged by inflation.
“The fundamentals of the economy are not reflective of negative growth, but there are some factors driving it down, mainly the deficit and the lack of government spending compared with last year,” Liang said.
Though the consumer continues to spend, the rising cost of everything is a cause for concern. Liang said it will be important to watch whether the effects of inflation begin to dampen discretional spending.
In contrast, business spending shows no signs of slowing. Expansion in manufacturing has hit almost two consecutive years. The only impediment to growth in the industrial sector continues to be the availability of material. “The U.S. has a very supply-constrained but demand-driven economy.”
Shifting her focus to the major steel-consuming sectors, Liang sees a decidedly mixed bag.
The biggest market for steel, automotive, remains challenged. After two successive years of low production levels from U.S. automakers, the industry was hopeful supply chain shortages would be a little lighter in 2022. But the early days of the year have quashed much of that enthusiasm.
The Russia-Ukraine war, lockdowns in China, protests in Canada and more at the Mexican border have all worked against the anticipated rebound.
“Right now, the supply chain constraints aren’t expected to ease until sometime in 2023. The forecast for automotive production has been revised down a half million this year, expecting some of that comeback next year,” she explained.
Behind automotive, construction is the next-biggest consumer of steel, spreading the opportunities between flat and long products. While nonresidential has been the bigger supporter of growth since the recession in 2008, the housing market finally took off with the onset of the pandemic as city dwellers and former commuters sought to escape to the suburbs and beyond.
The flip side to that is the deterioration of some major end markets in the nonres sector: office building and retail. Their outlooks remain shaky.
“What has been booming in nonresidential is warehouses and data centers. That support has kept nonresidential from taking a bigger dive,” she said.
Overall, the industry is expecting a 9 percent increase in construction spending in 2022. However, she noted, much of that increase is gobbled up by the price hikes for most raw materials, leaving the actual activity level growing by something closer to 3 percent over the next 12 months.
Of course, another major end market for steel stands to benefit from rising prices. The energy sector, one of the main drivers of inflation, should become one of the best segments for steel demand growth in the coming year. The price for a barrel of crude is exceeding $100 for the first time since 2014.
Thus far, the oil and gas exploration companies have not ramped up production as they have in the past when prices spiked, likely under pressure from shareholders.
“Even though there is a very rapid increase in oil prices, the drilling activity in the U.S. hasn’t picked up in this time period. We are starting to see oil makers stand out and say they want to explore more. We can see that reflected in the rig count numbers,” she said. “Pipe and tube consumption or oil platforms could be the right spot this year and coming into next year for steel consumption.”
Finally, there are service centers. Liang said the main takeaway from the distribution market is how much they’ve done to pare down inventory levels. Over the past 10 years, the months on hand average was approximately 2.2 to 2.3 months. But over the last two years, it’s closer to two months.
“Service centers have been trying to turn around their stock more and understand the market and their end users better,” she explained.
At the start of 2022, an increasing number of tons destined for the major steel-consuming markets were coming from imports. But that may change in the months ahead. As tons from both Russia and Ukraine will be limited, foreign steel that would have found its way to the U.S. may instead have other markets abroad.
That would be beneficial to the increasing number of tons being added to the U.S. market, in Sinton and other places, as it would give these domestic producers the opportunity to build market share as they ramp up capacity.
Overall, Liang expects the flat-rolled steel market to be relatively flat in 2022, with apparent steel consumption hovering between -0.5 to 0.5 percent. The story is a little better for long products, with growth in the 1 to 2 percent range, aided by infrastructure bill spending starting to kick in at the end of the year, she said.