Weak demand is likely to lead to increased losses in the world steel industry next quarter, which could prompt consolidation, the shakeout of marginal players and lower prices, much of the industry now predicts.
"The demand for steel is virtually nonexistent," says Dan DiMicco, CEO of steelmaker Nucor Corp., which reported a $189.6 million loss and said it expected a wider loss in the second quarter.
Steelmakers were hoping the first quarter would be its worst, in terms of losses, for 2009. Early signs that the housing market would pick up, that stimulus spending for projects such as bridges would boost consumption, and that an auto bailout would shore up a key steel customer were taken as clues that the steel market was headed for a turnaround.
Moreover, other commodities, including copper, have begun showing signs of life after nearly five months of plummeting demand. Freeport McMoRan Copper and Gold Inc., the largest copper producer in the U.S., said it expects copper prices to rise compared to the first three months of this year due in part to lower world inventories.
Prices of nickel, used in appliances and stainless steel, and lead used in electrodes and machinery also appear to be firming. Those commodities are showing improvement mostly because supply and demand are beginning to match.
To be sure, the price of all these commodities is much lower, often in the range of 50%, when compared to this time last year.
"As we have progressed from September 2008 to March 2009, we have seen business and market conditions worsen each succeeding month," Charlotte, N.C.-based Nucor said in a statement. "Entering the second quarter of 2009, both the U.S. economy and steel market conditions have continued to deteriorate."
Global crude-steel production fell in March in every major market, including China, which had increased production earlier in the year. The biggest drop was felt in North America, where production fell 52%, while Europe production fell 44%.
Nearly every major Chinese steelmaker has predicted losses for April, said Zhang Xiaogang, vice-chairman of the China Iron and Steel Association. Those losses are expected to continue, he said Tuesday.
The problem is that steelmakers ramped up production in anticipation of higher demand from new construction and investment through the Chinese stimulus package. But those projects take a while to get going, leaving the industry with too much, too soon.
If demand doesn't pick up soon, the industry will have to consolidate, with marginal players being bought out or closing. Mr. Zhang indicated such consolidation is critical if the steel industry wants to obtain pricing power with their suppliers, mainly iron-ore producers.
Across Europe, steelmakers don't see an upturn anytime soon, Europe's steel association, Eurofer, said Thursday.
"Orders intakes at EU steel mills are expected to be at unprecedented low levels for the time being," Eurofer said. Steel consumption in the first half of this year is expected to fall 40% to 45% compared with last year.
In the U.S., the deepening woes of the automakers translate into far fewer orders for steel.
General Motors Corp. is expected to idle most of its plants this summer for two months -- one of the longest hiatuses ever. That means big automotive suppliers AK Steel Holding Corp., U.S. Steel Corp. and ArcelorMittal likely will see further erosion in steel sales.
This week, AK Steel said it believed the worst was behind it. James L. Wainscott, chairman, president and CEO, said its first quarter $100 million loss would be narrowed to $50 million in the second quarter and that the West Chester, Ohio-based integrated steelmaker could swing to a profit by year end.
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