AIIS Steel News- February 2014

Executive Director’s Report

Since January’s Newsletter was published, I am pleased to report three important developments.

Development 1: First Ever Joint Cooperation Agreement

First, the AIIS expanded its global reach in February with a significant “first”: the first-ever joint cooperation agreement between the AIIS and a leading European counterpart, the EUROMETAL Steel Trade Study Group (STSG), a Luxembourg based non-profit association representing the interests of European steel traders and shippers. The STSG is one of four member organizations of the EUROMETAL consortium, which together represent 90 million tons of sales, 3,100 associated companies, 100,000 employees, and over 1 million customers.

The agreement, announced by both organizations on February 14, 2014, is in the form of a Memorandum of Understanding (MOU). The purpose of the MOU is to establish a framework for cooperation and to facilitate collaboration, particularly in advancing free and responsible trade in steel within international forums (such as the World Trade Organization and the Paris-based Organization for Economic Cooperation and Development) and in the context of trade negotiations. Under the agreement, each organization will become an Associate Member of the other organization.

The creation of this new trans-Atlantic partnership is an exciting advancement because it broadens our scope; enhances our potential effectiveness with respect to promoting the interests of our members in world steel markets, in foreign capitals, and with relevant international organizations; and serves as a template for possible additional future alliances with similar organizations.

I anticipate that the AIIS and EUROMETAL will in the near future consider drafting joint statements regarding current trade issues, as well as developing other joint activities.

A final word about our partnership with EUROMETAL: Although we deeply believe this is an important development for the AIIS, I also believe it is important to see this initiative not as a singular event, but as the first step toward a broader approach to the world steel market, with our new European partners and with others who may join with us in the future.

Development 2: Expanded Congressional Involvement

The second development I would like to bring to your attention this month relates to our expanded engagement with Congress. Early in January, AIIS Board member and Artco Group President and CEO Jeff Himmel, along with Artco Steel Vice President Damian Brennan, joined me and Assistant Director Alexandra Jopp for a meeting with Ohio Senator Rob Portman and Senator Portman’s Chief of Staff. Later in January, Alexandra and I went to the House side of Capitol Hill to meet with Ways and Means Committee Chief International Trade Counsel Angela Ellard, and her colleague Steve Claeys, also a trade counsel with the Committee and a former Commerce Department trade official.

We had a broad ranging discussion about the Congressional trade agenda in 2014, ocusing particularly on ways in which the AIIS might be helpful in advancing market-opening legislative initiatives. A significant part of this discussion focused on the role of the ports in international trade.

These two Congressional meetings, along with others in early 2014, set the stage for continued interaction with Representatives and Senators, and with their staff, who are closely involved with developing United States trade policy.

Development 3: New Port Member

Third, we welcome to the AIIS our newest member, the Port of Vancouver USA in Washington State. Our ports are vital elements of global supply and production chains, and the Port of Vancouver USA--a global Northwest hub located at a key crossroads of ocean-bound and river shipping lanes-- joins our ranks just as work to successfully conclude the multi-nation Trans-Pacific Partnership (TPP) negotiations intensifies. A successful outcome to the TPP negotiations is one of the AIIS’s highest priorities, and we are engaged in this effort through our work with Congress, the executive branch, and our allies in the private sector. The TPP is a top AIIS priority because U.S. economic engagement in the Asia- Pacific region is so significant to U.S. economic growth. With over 57 percent of global GDP, the Asia- Pacific area is both a key export market--potentially the most significant U.S. export market—as well as a leading partner in global supply chains. Port Vancouver USA is well-positioned to take advantage of any new, enhanced competitive environment that would accompany a successful outcome of the TPP talks, and the implementation of a final agreement.

As always, we are grateful for your advice regarding our efforts on your behalf, and welcome your suggestions.

Market Update

The Federal Government announced in late January its initial estimate for fourth quarter 2013 real GDP -- a healthy 3.2 percent annual rate over the third quarter. As reported in the February Market Update, the final calculation by the Government for third quarter GDP was 4.1 percent. These two data points seem to project a strengthening recovery. One could almost say they look close to being two robust consecutive quarters.

The initial fourth quarter GDP estimate – subject to two more revisions – reflects important positive elements, including positive reports regarding personal consumption, exports, nonresidential fixed investment, and inventory accumulation. The slowdown in the rate of growth from the third quarter, according to the report, included lower Federal Government expenditures, and, notably, a lower rate of inventory accumulation and residential construction.

The positive GDP report contrasts sharply with the less than stellar unemployment reports which month after month show employment gains far below what is necessary for strong overall economic growth. One of the explanations for the disparity would be that employment tends to be a lagging indicator, but the US economy is officially several years past the end of the recession of 2008-2009. The unemployment rate for January was 6.6 percent, down from 6.7 percent in December. Only 135,000 jobs were created, and the labor force participation rate shrunk again as former workers gave up looking for work and were no longer counted as unemployed. Politics is never far removed from a spirited discussion of unemployment, and many believe that the increased costs and uncertainties related to the implementation of the Affordable Care Act—“Obamacare”--have had a negative impact on job creation, particularly on the creation of full-time jobs.

The Institute for Supply Management Index for all manufacturing for the month of January came in at 51.3 percent, a sharp drop from the 57 posted in December. Since the rate remains above 50 percent, the Index still reflects a growing manufacturing sector, but clearly this month’s report is reason for concern.  

To view ISM Manufacturing Index, please Click Here

Looking at the components of the overall manufacturing index, the new orders report is especially worrisome, dropping 13.2 percent in January to 51.2 percent. Some of the respondents cited bad weather as an issue, it was noted.

For more steel-specific markets, the trends of the past months continue, but for the most consistently positive market sector, autos, weather was a factor for the January sales report, with Ford, Toyota, Honda and VW all posting declines. Chrysler however posted its best January sales record since 2008, according to press reports. Nissan also posted strong gains, while Nissan and

Hyundai reported small gains. Analysts have not changed the forecast for auto sales for 2014 from 16-16.5 million cars and light trucks notwithstanding the January report.

The Government report for construction posted a small gain overall -- .1 percent compared to November. Nonresidential construction declined by .6 percent during the same period.

During the course of the year, nonresidential construction improved by 10 percent due to the slump early in 2013, but unfortunately has not yet returned to the levels achieved at the end of 2012. Moreover, the monthly total for the all-important nonresidential construction market in December 2013 is still 25 percent lower than the peak in early 2008, and remains the single most important drag on the steel market. At the Port Tampa Bay Steel Conference February 7, steel analyst Chuck Bradford opined that he expects nonresidential construction to “start to pick up” in 2014. We hope he is right, and the long-awaited recovery in that critical sector becomes healthy, improving market conditions for all.

On balance, the steel market, like the overall economy, continues to limp forward. The good news, as reported in January’s Market Update, is that the normally positive seasonality appears to be in force this year, unlike in early 2013. For importers that is

especially good news, as the price increases in flat rolled in late 2013 have created opportunities for importers. We expect to see increases in imports in coming months as those products arrive after the normal lag for non-NAFTA imports. At mid-February,there is evidence (according to public sources) that prices are beginning to soften again as buyers’ inventory levels are increasing. If so, that is evidence that the 2014 steel market is starting to develop the so-called mini-cycles that defined the market in 2011 and 2012.

One final prediction from Chuck Bradford: he expects 2014 to be a good year for steel, but of course there is always the possibility that unexpected events could change that.

Steel Shorts

Steel Ports End of Year Results for Steel Imports

In early February, we received the end-of-year trade data, compiled by the Government on imports and exports of steel. We thought our readers might find it interesting to see the list of the largest steel ports that import steel products.

When looking at these data, one needs to keep in mind that they are compiled by Customs Districts, which usually include other importing sites other than the named port. The Philadelphia data for example, would include the other local entry ports. Also, some of the largest port totals are high due solely or largely to imports by domestic mills of semifinished steel products or hot rolled for further processing. San Francisco and Los Angeles immediately come to mind, with LA the import site for slabs for CSI, and San Francisco the import site for hot rolled for Korean hot rolled (for the joint venture between Posco and US Steel).

AIIS is proud of its strong support from our port members, many of whom are listed below – and many whose imports are incorporated (hidden) in the Customs port district data. Steel imports mean jobs, not just for steel importing companies and their customers, but also for port authority personnel, stevedores, customs brokers, and those who work in trucking, on railroads, barges, and in warehouses.

Mexico Steel and Autos, Growing Together

As reported in an AMM article, “Autos driving Mexican steel industry,” the Mexican steel industry is becoming one of the world’s steel powerhouses, driven by the auto industry. Auto production is booming, with 80 percent of the vehicles exported. In response, steel production grew 6 percent in 2013 compared to 2012, to 19.3 million metric tons. Steel output is expected to grow further based on a doubling of auto production to 4 million units in the next five years. It is important to note that US steel exports to Mexico include in 2013 over three-fourths of a million tons of zinc-coated sheet products, according to Government data, much of it likely for auto production. Total exports of steel to Mexico in 2013 were just over 4 million metric tons.

Chinese Economy Grows

The Chinese economy grew by 7.7 percent in 2013 compared to 2012. Government reports indicate that the GDP growth rate has been between 7.4 and 7.7 percent for the last 7 quarters. Industrial production outpaced GDP, posting a 10 percent rise. The government expects industrial production to slow in 2014 to 9 percent as consumer consumption grows. For example, rising incomes are supporting increased auto purchases, with sales in 2013 rising 14.76 percent, to 22.1 million units. Auto analysts predict auto sales growth to slow to 7.6 percent, which would push totals to 24 million units for the year.

Steel Versus Aluminum

The recent announcement that Ford had decided to redesign its F-150 full-size pickup truck’s body to feature aluminum caused a stir in many media quarters and in the two industries. Steel is answering the challenge, though. As reported in AMM, the steel industry is continuing to develop more, lighter-weight and stronger steels to combat the efforts by aluminum to move deeper into the auto sector. While aluminum is lighter than steel, it is also significantly more expensive. Steel has responded with “advanced high strength steels,” AHSS. Steel also believes that it has an advantage in the ease and cost of recycling as well. According to Lawrence Kavanagh, president of the Steel Market Development Institute: “as we methodically eliminate the lightweighting advantage of alternative materials, we increase the cost advantage of our materials…”

To view Steel Market Data, please Click Here