I discovered a new blog today on the steel industry, with an interesting and well thought out article on steel demand forecasts for this year by Tony Taccone. Whilst I am reproducing the full article here I would urge visitors to go over and check out the site, as there is a wealth of interesting material, and it's now found a place in my bookmarks.
2009 will be a difficult year for the global steel industry. How bad it gets and what happens on the other side of the global slowdown is impossible to predict. But there is no shortage of observers willing to paint a bleak picture. In a recent article in the Financial Times, Peter Marsh summed up the views of a number of analysts. Not surprisingly, the general consensus is decidedly negative. Here are a couple of excerpts: “Global steel production could easily plunge by 10 per cent or more next year” and (I’m paraphrasing here) “it could take 4-5 years for global production to return to the levels achieved in the first half of 2008.”
While these projections may prove to be right, they seem overly pessimistic to me. First of all, the latest forecast of global economic prospects published by the World Bank and discussed by James in a recent post, calls for the world economy to grow by 1.9% (PPP basis) in 2009. As I’ve argued in the past, there is a correlation between global GDP growth and the change in steel demand. If we plug 1.9% GDP growth into the model, the predicted decline in steel production for 2009 is -3% not -10%.
This is not to say that 10% is impossible, especially given the production cuts that mills have already made, but it does call into question whether a 10% reduction in global steel production is reasonable. Since the Second World War global steel production has never fallen by double digit levels in a single year. It came close in 1975 and 1982 when it fell by over 8%, and it has fallen on a cumulative basis by more than 10% over several years, but it has never fallen by 10% in a single year.
There is no question that these are unprecedented times and anything is possible, but I wouldn’t just accept what appears to be an emerging consensus that a double digit decline is inevitable. Don’t forget that developing economies, which now account for close to 50% of global GDP and whose demand for steel typically grows faster than GDP, are still projected to grow 4.5% next year. They have been driving the global growth in steel production and will continue to do so in 2009.
The second main theme that emerges from the FT article is that it might take 4-5 years to get back to the production level achieved in the first half of 2008. My response is the same. This seems overly pessimistic. The underlying growth of global steel production has been close to 6% per year for the last decade, driven by the emerging economies entering the steel-intensive phase of development. This process will not stop. It may slow for a time as the world economy deleverages and replenishes the capital base of the global banking system, but governments are responding aggressively to stimulate economies. Don’t be shocked if steel production in 2010 is as high as 2008. 2009 will be a difficult year no doubt. But let’s not spoil a difficult year by getting too enthusiastic about just how difficult.
It's a tough call forecasting demand, particularly in what are unprecedented economic times. A lot depends on the success or failure of political initiatives, and there I am on even more uncertain ground!