Scrap prices are on the upswing again, and steel prices should soon follow. But what about demand?

Ferrous scrap prices in most global markets began to rise steadily in the fourth quarter of last year and this trend has continued into the first month of the New Year. Steel producers have had no choice but to pass along - or at least try to pass along - their increased input costs to customers by raising their steel prices. However, with the economy still struggling, steel demand remains sluggish and steel buyers are still cautious in their approach. Therefore, despite the rising prices in many markets, steel orders, on the whole, remain light, as do inventories.

Some steel markets which have seen a decent recovery in demand since the onset of the recession, such as the US flat rolled market, seem to be absorbing the raw material-based price hikes of recent months, with prices for these products registering a rather impressive recovery during this period. Meanwhile, other markets, such as longs, have been slower to absorb the hikes, due largely to weaker end-markets such as construction. With the latest round of scrap cost increases that have taken place in January, producers of both long and flat products are expected to make a big push to raise prices for February. But despite the rising trend for raw materials, many in the steel industry are wary of the latest price developments, fearing that without strong demand to support them, the markets could turn around again in an instant.

Some think that further attempts of steelmakers to raise prices could make buyers even more wary than they already are, as the price bubble of 2008 is still fresh in their memories. Others hope that an improvement in demand will eventually follow the scrap price hikes this spring as the economy improves and more new projects get underway, and that this will help sustain the Q1 steel price increases. Then there are fears that the scrap market could turn around later in the first quarter once winter ends and scrap collection picks up again, which would also threaten to throw a wrench in steel's price recovery.

It is hard to say which scenario will take place, but it is safe to say that buyers' cautious attitudes should help prevent another price bubble and subsequent burst of it which caused a massive inventory overhang and rapid price drops in the steel markets in late 2008/early 2009.

Furthermore, despite the rising raw material prices, steel producers in most markets are still operating at significantly reduced capacities, which has allowed them to maintain a good degree of price control and prevented the market from being flooded again. So, while both raw material costs and demand will continue to be the primary drivers of the global steel markets, the guarded approach of both buyers and producers should help prevent any extreme price shifts in the near-term.

The Organization for Economic Cooperation and Development (OECD) said last week that it sees the global steel market in a state of recovery, but that it has concerns that it may face excess capacity in the coming years.
 
At a Paris meeting, the OECD said that the sharp decline in global steel demand that began in the second half of last year is now tapering off, and that the leaders of the recovery are, and will continue to be, emerging nations such as China and India. The World Steel Association (worldsteel) gave a similar assessment of the market last month, stating that although, for the year as a whole, global steel demand is expected to be down roughly -8.6 percent compared to 2008, we are in the midst of a slow recovery, in which we'll see demand improve by +9.2 percent next year. Worldsteel also expects that growth in steel demand in the coming years will come primarily from emerging markets while the rebound of developed nations will be much slower-going. However, while emerging markets are currently leading the global recovery in steel demand, it is just these markets that could pose a threat in the long-term due to their burgeoning steelmaking capacity.

The OECD warned that projections to 2012 show that global capacity may exceed demand "by a wide margin", and that most of this capacity will be in emerging markets. The OECD is not alone in its concerns; although China and others have taken a giant step back from the international steel market in the last couple of years, many in the steel industry fear that overcapacity, particularly from China, could eventually result in a flood of exports to developed countries, threatening to undo the global steel market's fledgling recovery.
The good news is that cumulative global steel production this year has, on the whole, remained consistent with the drop in demand, and perhaps even overshot the mark somewhat. Worldsteel figures show that for the first ten months of 2009, total worldwide steel production is down -13.5 percent compared to the corresponding period of 2008. However, the production figures for recent months may show the emergence of a different trend.

Global steelmaking capacity utilization rates have generally followed an upward trend since last spring, with current rates standing at 76 percent. October was the second month in a row in which overall production increased compared to the previous month, with October figures of 112 million metric tons (mmt) reflecting an increase of +13.1 percent from October 2008. In China, crude steel production for October 2009 totaled 51.7 mmt, +42.4 percent higher than the October 2008 figure. Although recently-released figures from China's National Bureau of Statistics show that China's crude steel output did slow slightly in November over October, YTD January to October production is still on pace to reach the China Iron and Steel Association's 2009 production forecast of 565 mmt in 2009 -- which would set a new historical record. Although China's steel market has seen an arguably strong pick-up in domestic demand this year, many question such a robust increase in production in the wake of the world's worst recession of the post-WWII era.

For now, at least, the US and other developed nations are seeing little threat from imports from China or elsewhere, due in part to year's pile-up of trade cases against steel imports, and also due to the strength of China's domestic steel market this year, and other factors, including the weakening USD. YTD steel imports through October by the US total 12,181,538 mt, less than half of the 24,905,160 mt imported in 2008. Of these 12 million tons, 1.2 million came from China, compared to 3.4 million in the same period of 2008. So, while it may not remain the case forever, for now, the US steel market remains, primarily, a domestic game, and we can probably expect this trend to continue through at least the first part of 2010.

There is good news and there is bad news. The good news is that the major economies of the world are finally getting back on their feet and are slowly but surely, edging into growth territory. But the bad news is that steel has seen little benefit from the economic turnaround as of yet, and it may be a while before it does.

Within the last week we learned that the US economy grew by a healthy 3.5 percent in the third quarter, while US manufacturing activity continued its gains in October, rising to its highest level since April 2006. Moreover, the China Construction Bank (CCB) now predicts China’s GDP growth will return to 10 percent as soon as the current quarter.

Still, with high and rising unemployment preventing a full recovery of consumer sentiment in the US, and much of the recent gains of manufacturing in the US and elsewhere driven more by inventory replenishment than by improved demand, there are doubts as to whether the current rates of growth can be sustained. For steel, this means that after starting to recover in the second and third quarters, global prices have started to slip back again in the fourth quarter as inventories have been replenished and there has still yet to be any significant pick-up in demand.

Specifically, pricing in the US longs and flat rolled markets has been drifting downward for over a month and no rebound is expected until the first quarter of 2010 at the latest. There are now worries that after rising for 18 consecutive weeks, US steel production has exceeded demand once again and capacities will have to be taken back offline in order to prevent another oversupply situation. Ending its nearly five-month rising streak, US raw steel output dipped by -0.8 percent last week, and this drop, slight as it is, may indicate the start of a falling trend that may last through at least the end of the year. In China, longs and flat rolled pricing is currently on an up-tick again after falling in September and October, but there are also doubts as to whether China’s uptick can be sustained while the rest of the world's appetite for steel remains at recessionary levels.

On Tuesday, the China Iron & Steel Association (CISA) warned that as China’s steel production expands and exports shrink, rising stockpiles may cause Chinese steel prices to decline in the fourth quarter. CISA figures show that at the end of September, steel inventories at 26 major Chinese cities rose 91 percent from the previous year to 11.13 million mt, while China’s steel exports dropped 68 percent year-to-date through September, totaling 15.7 million mt, and steel imports rose 37 percent during the same period. With China’s crude steel output expected to register a 10 percent increase this year, taking the weakening steel exports into account, CISA expects China’s steel supplies to rise 25 percent in 2009, which is likely to “spur further price decline.”

Although there is no one official indicator that could tell us whether the recession is over, all relevant signs are telling us that the recession has finally hit bottom. Nevertheless, while the worst may be over, the hardest part may have just begun.

The index of leading economic indicators rose in July for the fourth consecutive month, and the Federal Reserve released a statement earlier this month announcing that the economy has leveled. World steel production continues to rise on a monthly basis, with data released from worldsteel this week showing global output rose to 104 million mt in July – the highest monthly figure of 2009 and only -11.1 percent behind last July's pace.

The International Monetary Fund this week also declared that the global recession is over, and the recovery has started. But the IMF also made it clear that to sustain this recovery will require some crucial changes in international trade as we know it.

The United States is still the primary driver of the world economy, though China is quickly catching up. However, 70 percent of the US economy is dependent on consumption, which continues to be stifled under the weight of the recession, particularly the high number of unemployed. Furthermore, China's economy has depended primarily on exports, and its biggest export market is -- you guessed it -- the US. According to the IMF, a recovery of the world economy will require a reversal of this dynamic, with the US turning its focus to exports and China beginning to import more.

IMF chief economist Oliver Blanchard said in an article released by the IMF this week that as the US consumers are unlikely to return to their previous levels of consumption in the near future, emerging economies, especially China, will have to step in and start importing from the US. For the steel industry, this would mean a major shift from the current paradigm, but would also present an opportunity for tremendous growth.

In 2008, the US bought $337.7 billion worth of goods from China, while China bought only $69.7 billion from the US, resulting in a trade deficit of $268 billion. In other words, for every dollar the Chinese spent on US products, the US spent nearly $5 on products from China. This gap has narrowed slightly under the weight of decreased US consumption which resulted in less imports from China; however, US exports to China (and elsewhere) have also dropped, so the size of US trade deficit with China remains large and the overall dynamic of the US being a net importer of Chinese goods remains unchanged.

On the steel side, US exports have remained at less than one million metric tons per-month this year, with the latest data showing 640,337 mt in June. This figure is up 12 percent from May, but down -42 percent from June 2008. And of the tons exported in June 2009, only about 21,000 mt went to China. After surging to 660,000 mt in October 2008 Chinese steel exports to the US have also slowed to a trickle, totaling only 40,000 mt in June.

Although steel trade does not represent a big portion of the overall trade between the US and China, it does follow a similar trend as overall US-China trade. As the economy has weakened, US imports from China have declined, though the US is still importing more from China than it exports. At the same time, Chinese consumption, of both steel and other goods, is increasing. China's steel consumption is expanding even in the midst of the recession, while its exports have slowed, indicating that its internal consumption is increasing. So, China could represent a major market for US-produced steel, if the circumstances were right.

If certain trade-influencing barriers were leveled (China's low currency valuation to the USD is a big one), the climate may be right to make such a shift in the US and China's trade relationship. The Obama Administration for one has indicated that it will emphasize US exports as a key to economic recovery. Just this week, the president ordered a review of export control regulations, which was gladly welcomed by exporters and manufacturers who face strict regulations under the current law on exports of a number of products, including wires and bolts. The Obama Administration along with the European Union also earlier this year launched a formal WTO complaint against China's restrictions on imports of raw materials for steel, aluminum and chemical manufacturing, which US Trade Rep. Ron Kirk described as putting US manufacturers at an unfair disadvantage.

It remains to be seen whether the US will be successful in toppling the trade barriers that keep the current trade paradigm in place despite the changing consumption trends; however, if these changes go through than not only do US steel producers and other US manufacturers stand to benefit, but the entire world economy does as well.

Despite some recent glimmers of hope, the international steel markets have yet to post a full-fledged recovery due to the continuing contraction of the global and regional economies. And judging from the latest economic data, just about all of the key economic indicators continue to decline, meaning it will likely be a while before the steel sector recovers fully or even starts to trend upward again. However, the good news is that the economy's rate of decline has slowed to a less severe pace that may be easier to endure for an extended period of time.

April sales data for domestic and foreign auto sales in the US showed a continued contraction, with General Motors and Ford announcing sales declines in excess of 30 percent from the same month of last year, Chrysler dropping 48 percent and Toyota declining 41.9 percent from a year ago. Chrysler's filing for Chapter 11 bankruptcy protection added to the bad auto news this week and marked a sad new milestone in US automotive history. However, restructuring is not necessarily a death sentence, and analysts are saying the sector may have hit bottom, as both GM and Ford reported increases in April sales compared to March, and Ford was able to grab a larger share of the US auto market with its new Flex vehicle. The executive VP of sales for American Honda, which saw a 25.3 percent y-o-y sales drop-off in April, commented, "Overall sales are, by far, the highest we have seen so far this year."

Purchasing Managers' Index data released by the Institute for Supply Management this week also showed further contraction of the manufacturing sector and overall economy in April; however, the PMI figures had a silver lining as well. The figures showed that the pace of both the economy's contraction, and that of manufacturing, was slower in April than it was in March. Also, customer inventories continued to shrink, with the PMI classifying them as being "too low" compared to "too high" in March. And steel inventories are shrinking, too.

While steel purchasing activity still remains significantly depressed since last year, it can generally be said that with the drastic cuts in steel production, distributor, service center and downstream manufacturers' steel inventories are growing ever-leaner. While these companies haven't seen a rebound in business to justify full inventory replenishment, they are now buying steel in at least small amounts. The inventory reduction cycle seems to have come to an end, and now companies are operating on a more "hand-to-mouth" basis. This means much leaner commercial steel activity is taking place compared to a year ago in terms of tons, but it is still an improvement from much of Q4 '08 and Q1 of this year when steel inventories were more plentiful. Also, with companies operating with such anemic inventories, once the economy and steel demand start to hit their stride again, there may be a steel shortage once again.

For now, though, steel business in most markets is still flat at best. Prices for most products are still inching down in North and South America, while Turkish and European producers are struggling to maintain their recent modest price increases. The sentiment in Asia is still slightly up, but there are still few signs that demand in the region has recovered sufficiently, and Asian producers will continue to suffer from the reduced demand for their steel and manufactured goods exports.

Overall, it is safe to say that while it may be some time before a full recovery is seen, the steelmakers of the world have adjusted to the “new normal” business conditions in the context of an extended recession. They understand that demand will not skyrocket upwards anytime soon and have adjusted their operations accordingly, poised for surviving what will likely be a long, but perhaps not particularly brutal, slump.

Indeed, the steel markets are already starting to firm up somewhat in certain regions, with Turkish longs seeing an up-tick in bookings from North Africa, particularly Egypt, in recent weeks. This increase in activity has positively affected scrap, billet and longs prices in North Africa, the Middle East and Europe, especially in Turkey, which is the primary longs exporter to these regions, accounting for 24 percent of all steel exports to N. Africa and the Middle East (according to data presented at the 2009 Arab Steel Summit held this week in Abu Dhabi, by UK-based Iron and Steel Statistics Bureau operations director Steve Mackrell).

However, it remains to be seen whether these markets are embarking on a trend of sustained recovery, or if the markets are just undergoing a short-lived revival in the context of a prolonged slump. Although Turkish and European producers are encouraged by the recent bookings and increases in scrap prices, unless demand starts to pick up in other regions, the new price levels may not get any traction. Despite the optimism and positivity displayed by European market players in Athens, it was evident, at the meeting and in the markets, that one of the world's largest steel consumers, the United States, has yet to resume purchasing. Virtually no deals or even negotiations have been taking place between US buyers and Turkish mills.

While President Obama said this week that the US economy is showing some “glimmers of hope”, he tempered that optimistic statement by warning, “by no means are we out of the woods,” and also admitting, “2009 will be a difficult year.” The glimmers of hope the president refers to are the recent positive signs in home sales and building, a new wave of refinancing underway and signs that credit is starting to flow again. A rise in bank profits and new clean energy industry hires are other bright spots. The enormous amount of capital that the government has flushed into the system seems to be doing its intended job of bolstering the economy. But the country's GDP is expected to continue contracting throughout the year, with further job losses, foreclosures and erratic stock market movement in store.

Of course, the recession is not limited to the United States, and the steel markets around the world continue to be affected by the global slump. Signs of the recession's continued effect on steel include an increasing wariness of Chinese imports, with US pipe makers filing an antidumping and countervailing duty case against Chinese OCTG last week, and a large group of steelmakers from three continents (North America, South America and Europe) petitioning the Chinese government this week to stop subsidizing its steel industry. Steel prices and demand around the world remain at severely reduced levels from a year ago, and in spite of the recent price hikes in Europe, steel prices continue to decline in several key regions including North America and, despite an up-tick seen in the first two months of the year, in China.

Still, as with the economy, amid the general slump, some “glimmers of hope” are appearing for the steel industry as well, bringing at least a little bit of much-needed optimism to the sector and dispelling some of the fear that has been keeping buyers from returning to the markets. Although 2009 will undoubtedly be a difficult year for steel, as more encouraging signs are appearing on the horizon, it seems quite likely that the worst is, indeed, behind us.

The prospect of a global steel market recovery in 2009 is still looking pretty dim as of the third week of March; however, there is still a good chance that by this time next year, things will at least be on the road to recovery.

First, the bad news: After the global economy shrank by an unprecedented five percent in the fourth quarter of 2008, The International Monetary Fund said this week that it expects the global economy to shrink by as much as one percent this year. This figure was revised from the group's earlier forecast of 0.5 percent growth. The IMF's latest predictions for the 2009 GDPs of key regions of the world are as follows:

US: -2.6%
Euro-zone: -3.2%
Japan: -5.8%(!)
Emerging and developing countries: +1.5 to +2.5%

Now the not-so-bad-but-still-pretty-bad news: The IMF expects the world economy to grow by an average of 1.5 to 2.5 percent in 2010. However, this kind of growth still qualifies as a recession, and even this small up-tick is dependent on the success of the world governments in ending the financial crisis. “In the event of further delays in implementing comprehensive policies to stabilize financial conditions, the recession will be deeper and more prolonged,” according to the report.

Of course, we all know that it will be tough, if not impossible, for the steel market to rebound without marked improvement in the economy. Furthermore, the Chinese steel market, really the only segment of the global steel market that seemed well on its way to recovery in January and February, is now starting to show signs of weakening again, prompting criticism that mills “jumped the gun” by ramping up production too soon, over-estimating demand. A similar trend in the US flat rolled market has also been observed – sources say that mills increased production in January for a rebound in demand that never came, resulting in excess supplies which are now causing further weakening.

On the other hand, while there certainly doesn't seem to be a big turnaround in sight for steel or the economy (though various federal spending packages around the world should certainly provide at least a minor boost to steel consumption), there are at least signs that things are starting to “level off”, albeit at very low levels. Steel companies report that business remains very slow, but has not continued to weaken further with each passing week. And it seems like the same could be said for many facets of the economy.

An index tracking the leading economic indicators for the US did drop by 0.4 percent in February (the Leading Indicators Index), although it was less than the forecasted drop of 0.6 percent. Jobless claims and manufacturing levels were still very weak in February but did not see sharp drops from the previous month. There were even a few unexpected gains in February – housing starts rose by 22 percent from January and retail sales were much better than forecast. The PPI (Producer Prices Index) and CPI (Consumer Prices Index) also inched up in February. It is probably too soon to say that the US or world economies are out of the woods just yet, and things will still probably get worse before they get better. However, it is definitely encouraging that the major indicators of economic health are only edging slightly down rather than sinking like a rock.

President Obama has announced that the $27 billion of the economic stimulus package dedicated to rebuilding America's roads and bridges has been formally released. This is a pretty big deal for steel, particularly for long products like rebar. While the total investment for these projects is not huge compared to some of the other recipients of the stimulus funds, it is, as VP Joe Biden says, “the largest new investment in America’s infrastructure since President Eisenhower built the interstate highway system.”

Despite the current weak demand for steel for commercial applications, these infrastructure projects should certainly provide at least a small boost to the ailing industry, and may even help light the spark to bring about an eventual economic recovery. And it is important to remember that in the long run, the US' needs for such infrastructure renovations, of which steel is a primary ingredient, will only increase – the US Transportation Policy and Revenue Study Commission estimates that a hefty $225 billion per year needs to be spent to maintain and repair America's aging infrastructure for the next 50 years. Whether sufficient funds for these repairs will actually come through, of course, is not a sure thing, but the demand for them will only intensify as more time passes.

Taking a wider view to include the world's next largest economy after the US, there are also some signs of a recovery in China's economy this week. We learned that China's purchasing manager's index moved up in February. While this closely watched index has yet to post a full recovery, the February PMI data led many economists to speculate that China has already seen the worst of its downturn. China's PMI hit a low of 38.8 in November, rising to 45.3 in January and 49 in February (though any number below 50 indicates contraction.)

It remains to be seen whether China's uptrend will be sustainable, though it is generally thought that China will emerge from its economic slump before the rest of the world. Prime Minister Wen Jiabao is optimistic that China will hit its eight percent growth target for the year, though many are skeptical. The up-tick in Chinese steel activity has slowed somewhat from the beginning of the year, though Chinese steel yet to re-emerge on the import scene, perhaps due to decent domestic demand or perhaps on fears of antidumping. Nevertheless, any good news out of China is encouraging, as it in many respects China holds the key to the global economic machine.

India is probably the next strongest growth area after China, and there was some positive news from this country this week as well – one of the nation's largest steelmakers, JSW Steel, announced that its steel production surged 8.5 percent in February 2009 over the same month of the previous year on the back of improved demand from the automobile construction and white goods sectors. Although on the whole, India's steel market has yet to recover from its own problems, the ramping up of production is likely a good sign (though, of course, only if it is based on an actual increase in demand, as JSW claims). And while India's GDP growth will likely take a breather this year, economists are forecasting a rate of four to six percent, which is much higher than anywhere but China.

So, while more news about the economic slump seems to emerge on a daily basis, perhaps it's good sometimes to take a step back and look at the big picture. It is undeniable that the rapid growth of developing nations like China and India will make for increased steel production in the long run, and the rising need to retrofit the aging infrastructure of developed nations, like the United States, is similarly inevitable.

After a period of stabilization in the steel markets which was observed in the first few weeks of the New Year, prices seem to be trending slightly downward again due the prolonged soft demand for steel around the world. Major economies around the world are still contracting, and the prospect of a turnaround in 2009 is looking less and less likely.

In the United States, leading long product producer Nucor Corp. announced this week that it would keep transaction prices for rebar stable for another month, though unofficially, buyers say spot prices continue to trend down as mills are still getting very few orders. Nucor's merchant bar and structural products will drop by $30/nt, or the amount that US shredded scrap prices dropped in February, which came as no surprise. US flats and tubes are still trending down as well, with more price softening expected in the near future. Meanwhile, import prices in the US for most steel products continue to drop as major import sources like Turkey and Mexico are still seeing a lot of weakness in their home and export markets.

Further layoffs were also announced in the American steel sector this week, with US Steel cutting the majority of the 400 remaining workers at its Granite City, Illinois works, adding to the 1,600 workers at the plant that were laid off when the plant was first idled in December. As with much of the other recently idled steelmaking facilities across the nation, the company says it does not know if or when the plant will reopen. On the service center side, the Metals Service Center Institute reported this week that steel shipments from US and Canadian service centers fell at “unprecedented” levels in January, with US shipments of 2.6 million tons down 43 percent and Canadian shipments of 400,000 tons down 38 percent from year-ago levels. Things are not looking any better on the end-use front, with the outlooks for housing and automotive getting increasingly bleaker.

So, despite the best efforts of steel producers, not just in the US but around the world, to keep prices stable by decreasing production, prices for nearly all steel products, including scrap, longs, flats, tubulars, you name it, are weakening along with the soft demand for these products. Granted, the price decreases taking place are not as drastic as the drops seen in the latter half of 2008, but it is disconcerting to many steel market professionals that prices don't seem to have hit bottom yet.

Even in China, where the steel markets seemed to be improving in stride with the implementation of its infrastructure-intensive economic stimulus plan, scrap and finished steel prices have started to soften in the last couple weeks and a lot of the confidence in the market observed prior to the Chinese New Year has all but evaporated. While it is still one of the stronger steel markets around the world, it may be the case that the one bright spot in the global steel markets is growing dimmer. With international steel demand remaining at very weak levels, Chinese steel exports have slowed, and stockpiles have started to rise again. Nevertheless, many are predicting China's steel market, and general economy, will be the first in the world to emerge from the current slump. With the way things are going though, it may happen later rather than sooner.

However, lest you think that I am all doom and gloom, I will note that there are definitely some positive developments taking place, too. The MSCI report, while showing a drop in shipments, also showed a drop in inventory levels (in the US, January 2009 inventory levels were 14.9 percent lower than in January 2008), which will bode well for the market once demand starts to improve.

Furthermore, the $787 billion stimulus package that President Obama signed into action this week should also play its part in reviving the economy, and the steel sector along with it. While steel won't see a huge boost in direct consumption from the stimulus projects, it may see plenty of indirect benefits, such as business tax breaks. Furthermore, the infrastructure renewal portion of the package has already encouraged some producers to plan for an increase in demand -- ArcelorMittal announced this week that the company will create 200 new jobs at its Steelton, Pennsylvania plant, which produces products for the rail and mass transit industries. The company expects an increase in demand for their products as a result of the railroad modernization and expansion provisions contained in the stimulus.

The main question, though, remains whether the spark provided by the US stimulus package, as well as other stimulus packages being implemented around the world, will light a lasting fire that will bring the global economy out of recession.

Silence dominated the longs markets in just about all regions, with very few transactions taking place in the Middle East, Europe or North America. As for flats, the only global market that saw much of any change was the Middle East, where market sources reported a slight rebound of activity. But overall, most markets remain very quiet as buyers continue to refrain from making purchases due to the weak end-demand, tight credit and unsettling economic conditions.

Chinese mills, which have held prices for most products firm at relatively high levels, were on vacation this week for the Chinese New Year and hope to see an increase in demand when they return to the market next week. While the steel markets typically start to improve after the Chinese New Year with further strengthening in the second quarter, there is a good chance that this year will be anything but typical.

In the US, several major steelmakers released their fourth quarter earnings results this week, and they weren't too pretty. Of the American steelmakers, only US Steel posted an increase in profits from the third quarter, which the company attributed to the success of its tubular division. Going forward, however, the company expects far less attractive results in the first quarter of '09, since the once-strong market for oil-related tubular goods has all but evaporated.

Fourth quarter GDP data for the US also came out this week. The Commerce Department reported that the United States' Gross Domestic Product fell 3.8 percent in the fourth quarter of 2008, the steepest rate of quarterly decline seen in 28 years. President Obama aptly called these new GDP figures evidence of a “continuing disaster for American working families.” However, for those who like to look for the silver lining in grim situations, the good news was that the decline was less sharp than the 5.5 percent decline that analysts had predicted.

Another piece of somewhat good news this week was that crude oil prices inched up to $42/barrel as of Friday, prompting some speculation that oil prices have bottomed out. The potential strike of the United Steelworkers Union members who work for Shell are threatening may also provide some upward pressure on oil prices, as the workers in questions represent one half of the nation's refining capacity. If the USW and Shell fail to reach a new labor contract before the current contract expires this Sunday, this strike may become a reality.

Generally, there seems to be growing consensus that the current downturn, both in the US and globally, is unlikely to turn around in 2009. The International Monetary Fund now expects 2009 global GDP growth to total only 0.5 percent due to the bad debt-led US recession. The IMF sees US GDP contracting 1.6 percent in 2009; the euro zone's down 2 percent and Japan's down 2.6 percent. If any doubt remained as to just how bad things are for the global economy, the IMF made things crystal clear this week, punctuating its 2009 outlook by remarking that the world's advanced economies will experience their worst contraction since World War II.

For steel, further economic weakening around the world obviously means more bad news, as the largest steel-consuming sectors – housing and automotive -- will continue to be adversely affected by the general economic conditions.

Last, but certainly not least, the US House of Representatives this week passed the House Democrats' version of the economic stimulus package, despite not receiving one Republican vote. The Senate will vote on the package next week, although it will have to gain some Republican support in order to pass. It is almost certain that at least some version of the bill will go through, though it may undergo some changes in the Senate in order to garner some Republican votes. While there is a good deal of skepticism as to just how effectively this infusion of government spending will “stimulate” the economy, at this point, it remains the one bright spot of hope for steel and other industries, and for the nation at large.

Steel prices around the world trended mostly sideways over the past week, as production cuts seem to have stemmed the price deterioration, yet demand is not strong enough for prices to post a significant rebound.

In the US this week, President Barack Obama's inauguration this week lifted many spirits; however, the nation is well aware of the serious economic challenges it faces. Repairing the economy is at the top of President Obama's agenda, and the much-talked about $850 billion economic recovery package is making its way through Congress. Still, the President warns that it will not be a “quick fix”, and analysts expect that the current recession will probably get worse before it gets better, extending as long as 18 months.

Wall Street took another plunge this week as the Bank of America and Citibank posted huge, toxic asset-related losses. News of an increase in the weekly number of new unemployment claims and of the shop drop in housing starts added to the gloom, as did news of British banks taking steps towards nationalization. Major job cuts were announced this week from software giant Microsoft, which will slash 5,000 jobs over the next year and a half, and the world's biggest mining company BHP Billiton, which will shed 6,000 positions.

Obviously, with such grave troubles in the macroeconomic realm, the current conditions are not allowing for much improvement in the steel sector. In addition to the massive layoffs announced by BHP Billiton, the list of further steel and mining company job and production cuts continued to mount this week. On the job side, most notably, CSN (according to union officials) and Evraz have plans to layoff hundreds in Brazil and Canada, and on the production side, Nippon Still will cut output by a tremendous 4 million mt for the fiscal year through March.

On the bright side, steel prices themselves have remained mostly stable in recent weeks. Turkish scrap buys from the US have slowed down, but demand from the Far East is keeping US export scrap prices stable. US prices for scrap and most finished products also continued to trend sideways this week. Domestic long product demand in Turkey has yet to see a recovery, but the change in $/YTL rate has helped local prices, and producers are seeing some export interest from North Africa. Chinese production and prices continue to slowly rise on the back of its national stimulus package and recent adjustments to its monetary policy, though the market did see some slowdown this week due to the approaching Chinese New Year holiday. European buyers have returned from their myriad holidays, but have yet to return to the market. Things remain very quiet in Europe and in the Middle East. Flats prices just about everywhere except China were either stable or slightly down this week. Overall, world steel production remains at reduced levels and end-use demand has yet to recover, while inventories continue to shrink as the slow de-stocking activity continues.

Looking forward, in the next several months, steel prices are not expected to see a rapid recovery, but at the same time, the period of sharp price reduction is likely behind us. The economic malaise and credit crunch will continue to create a tough environment for steel, but with disciplined production and underlying need for infrastructure improvements in both the developed and emerging nations, the steel market is better-positioned than many industries during this very challenging time.

This week, the steel market, on balance, continued on the same course it has been traveling since the fourth quarter of last year, with pricing either moving sideways or downward and production remaining at decreased levels to keep in step with the weak demand, all amid general economic malaise. And yet, the industry is looking squarely towards the future, with high hopes that conditions will eventually start to improve.

We learned this week that last week's estimated US raw steel production, on the bright side, broke 1 million net tons, coming in at 1.062 million nt. This figure reflects an increase of 22.7 percent from the 866,000 nt produced in the previous week. However, compared to the same week of last year, US raw steel production was down 50.7 percent. Capacity utilization stood at 44.5 percent, up from 36.3 percent in the previous week, but a far cry from the 90.3 percent utilization rate in the year-ago period.

In the US, pricing for most products continued to trend sideways. With Chicago shredded scrap prices only rising a disappointing $8/long ton in early January, domestic longs leader Nucor announced this week that it would keep transaction prices for rebar, merchant bar and structural products stable in February, decreasing base prices by the same small amount that raw material costs rose. Steel Dynamics Inc. (SDI) took the lead on announcing February wide flange beam prices this week, also indicating it will keep prices stable.

Things are looking slightly brighter on the US flats side, with the market seeming to have reached a definite bottom, and the same can be said for import offers of most steel products; still, no segments of the US steel markets, or any of the global steel markets for that matter, are seeing a major rebound yet.

Looking to the international steel markets, the longs market in Turkey is starting to improve, as is the flats market, due largely to the recently imposed import tax. Scrap purchases from Turkish mills are also picking up, thus bolstering international scrap prices. The Chinese steel market is also starting to show some positive signs, as the country's economic stimulus package is starting to take effect and prices for most steel products are inching upwards. A new national stimulus package custom tailored for the Chinese steel and auto industries was also announced this week, which will ban expansion of steelmaking capacity, cut the sales tax on some vehicles and encourage mergers and acquisitions in both sectors. The European, Middle Eastern and CIS markets, however, remain very quiet, as high inventories and weak demand continue to inhibit sales activity.

On the economic front, more disappointing figures were released this week. We found out that US retail sales dropped 2.7 percent in December from November, more than twice what was originally expected. This, along with fresh banking troubles and a further drop in oil prices led to a mid-week plunge in the stock markets around the world.

But perhaps the biggest news for steel this week is the $825 billion economic recovery plan unveiled by House Democrats and President-elect Barack Obama's economic team. The proposed American Recovery and Reinvestment Bill includes $90 billion in infrastructure spending, which the steel industry, needless to say, is excited about. In fact, with this being virtually the only bright spot in the otherwise dismal demand conditions for steel, most steel companies are banking on this infrastructure renewal plan for their road to recovery. This package is drawing criticism from some Republicans in Congress for its size, and it will likely undergo some changes as it moves from the House to Senate, but the President-elect wants the bill on his desk by mid-February, and he is expected to get it. After the new legislation is signed, it will take at least six months or longer, however, for the steel market to fully feel its effects. The industry, is hopeful, though, that the plan will, more immediately, have the intended effect of jump-starting the moribund economy, which is arguably the underlying culprit of the weak steel demand.

Inauguration of the 44^th President of the United States will take place next Tuesday, and there is certainly a lot of excitement in the air as President-elect Obama takes the reigns from the unpopular Bush Administration. Whether the nation's new leader and his ambitious economic stimulus plan will be able to steer the country back on the right path remains to be seen, but recent Gallup Poll results show soaring confidence among Americans that Obama will be able to achieve his campaign promises and lead the US on the road to economic recovery. The nation has emerged from tough economic times before, and there are many of us who believe that if anyone can steer us back on course, it's him.

Although 2008 ended with a whimper, 2009 started with ... more whimpering. While there is a certain amount of optimism in the air that comes with a New Year, the global steel market is undoubtedly off to a slow start this January.

There was some good news for steel, though, in this first working week of 2009. US flat rolled steelmaker AK Steel raised the surcharge for its high-grade electrical steel products, and also announced that it would soon restart production at its Ashland, Kentucky blast furnace (though there is talk that the company may idle its blast furnace at Middletown Works). US wire rod producer, ArcelorMittal Georgetown also brought some workers back to work this week in preparation for a restart.

There was still no scrap price increase for the US domestic market this week, though Turkish buying from the US picked up. Additionally, US spot prices for HRC and CRC started to firm up ever-so-slightly (though no official increase is expected to be announced by the mills this month), as did import flats offers. While prices for most other steel products in the US remained flat, at least prices are no longer in free-fall mode, and the market seems to have finally bottomed out.

Total US raw steel production for the week ended January 3, 2009, we learned this week, was operating at only 36.3 percent capacity, resulting in an amazing 59.3 percent decrease in production from the same week of 2008. In some ways this is bad news, as it indicates the tremendous drop in steel demand since last year, but it is good news in that these major production cuts will help prevent an oversupply situation despite the weak demand, and will hopefully lead to a market rebound sooner rather than later. The reduced import arrivals are another factor that will help control US steel supplies. Import permit application data from the US Department of Commerce showed us this week that steel imports dropped 10 percent from November preliminary import total, and making for a 5 percent decrease in steel imports for the full year (over 2007).

Around the world, the Chinese steel market continued to see modest improvements this week, with scrap, flats and longs all trending slightly up. Turkish scrap prices remained at high levels, and Turkish flat prices were trending slightly up, though Turkish longs did not see much improvement.

Another somewhat positive indication for the steel market this week is that crude oil settled at about $43 a barrel, which is down from its rally to over $50 last week, but well above the $33 low it hit in December. Another potential positive for steel is President-elect Obama's proposed economic stimulus package, which domestic steel advocates argued this week should be largely devoted to steel-intensive infrastructure projects. Such a plan would boost the economy and the steel industry, the advocates argue. It remains to be seen, though, whether this “steel stimulus” plan will be made a major priority of the new administration.

On the other hand, while there were some positive indications for steel this week, we are still in a recession, and for every piece of good news, there seems to be about ten bad ones. There seemed to be more bad news about the economy just about every day this week, and on just about every front, including housing, automotive, manufacturing, jobs, you name it. This week we learned: Pending sales of existing US homes hit a 7-year low in December; US auto sales in 2008 hit their lowest level since 1992; factory orders plunged 4.6 percent in November, while factory sales were down 5 percent – the biggest drop on record. Furthermore, the US lost half a million jobs in December. And to top it all off, Obama warned that the US federal deficit is set to exceed a whopping US$1 trillion as the economy continues to weaken.

Nevertheless, we cannot get bogged down by all the bad news, despite the temptation to do so. The US and global economies have emerged from recessions before, and there is no doubt that they will again. The question is when. Unfortunately, it probably won't be quick or easy, for the economy at large, or for steel, to rebound from the current slump. But hopefully, next week there will be a little bit more good news peppered in with the bad.