US metals producers are unlikely to regain pre-recession levels of output over the next five years amid a slow and uncertain recovery, raising the prospect of permanent mill closures, according to BMI's latest US Metals Report. In the first eight months of 2009, crude steel output was down 49.1% year-on-year (y-o-y) to 34.7mn tonnes; in August, output was down 40.0% y-o-y to 5.2mn tonnes, but up 3.2% month-on-month (m-o-m) and 36.8% above the low of 3.8mn tonnes reported in April. By Q309, capacity utilisation at US steel mills was around 55%, up from an average 45% seen in H109. In July, while steel mills saw a 15% increase in orders, actual sales at service centres barely rose. Finished steel imports fell at a higher rate than domestic crude steel production, indicating that foreign producers may be losing their market share. This is due in large part to the weakness of the US dollar and the measures taken by the federal government to boost the sales of domestic producers, notably the 'Buy America' clause in which domestically produced steel is being used in federal government financed infrastructure projects. US steel and aluminium producers have benefited from the Car Allowance Rebate System (CARS), which prompted carmakers to boost 2009 production following a long period of inventory cuts. Sales in July grew 16% m-o-m and while the market still contracted in y-o-y terms, declines were much lower than earlier in the year. The boost to the automotive industry led to restarts of idled mills, with hot-rolled sheets up 44% m-o-m and cold-rolled sheets up 32% m-o-m in August. However, BMI believes that demand for steel will diminish following the winding down of the programme at the end of August, with initial figures for September indicating the second lowest monthly sales level in 2009. With inventories at extremely low levels by Q3, it is unlikely steel output will fall to the kind of lows seen earlier in 2009, but BMI does not envisage a dramatic surge. Meanwhile, the longs market will be affected by a lacklustre performance in the construction industry, which unlike flats has yet to feel any revival in demand, but the effects will only start to trickle through in 2010 when the contraction in construction will be far less pronounced than in 2009. This should lead to restocking of steel long products, but BMI predicts only modest growth in the market in 2010. Yet, at the same time, capacity is set to increase, leading to the distinct possibility of over-capacity problems. BMI expects decreases of 42.2% and 35% in apparent crude and finished steel consumption, respectively in 2009, followed by rises of 7.2% and 5.4% in 2010. While BMI anticipates a U-shaped market recovery in coming years, we do not forecast a return to pre-recession levels of consumption. This will have a knock-on effect on domestic production as well as imports. Crude steel output will only exceed 80mn tonnes in 2013 and will be 13-18mn tonnes below pre-recession rates, raising the prospect of permanent blast furnace closures. Mini-mills will likely be the first to benefit from a recovery as they are able to bring back capacity more quickly than their integrated rivals. In terms of steel products, the strongest sector is likely to be rebar due to the infrastructural programme, but even this segment is likely to see an overall decline over pre-2008 levels. US producers will find little comfort in external markets, with exports struggling to compete with surging Asian output, particularly in automotive sheet and heavy plate. Exports are forecast to decline by 45% to just under 6.0mn tonnes in 2009, but will grow to 7.8mn tonnes by 2013, though this is still 28% below 2008 levels. At the same time, sluggish consumption rates will undermine a recovery in imports, which will reach 25.6mn tonnes by 2013, a decline of 17% over 2008. The aluminium smelting industry will have a tougher time due to high energy costs and increasing global competition as well as the country's lack of bauxite. Even before the financial crisis began to take effect, over 30% of the US's smelting capacity had been idled, although domestic output continued to climb up until mid-2008 and dependence on imports fell. BMI believes that some smelting capacity currently idled will be permanently closed, which could include at least one of three smelters idled by Alcoa. On the upside, falling oil prices should enable smelting operations to negotiate lower electricity tariffs over the medium-term. By 2013, BMI believes total aluminium output will approach levels seen in 2008, but secondary smelters will increase their share of output.
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