U.S. Steel demand up, but for how long?

U.S. Steel demand up, but for how long? ArcelorMittal is eyeing a restart of some facilities in the United States in response to an uptick in steel demand, said the firm's chief executive. Lakshmi Mittal said his company has seen a modest improvement in U.S. markets in recent weeks. ArcelorMittal's plants there have been operating at an average 50 per cent capacity. But it is unclear whether that increase in demand is sustainable, he cautioned. Although government stimulus packages have halted the domino effect of financial collapse, "the situation is still precarious and a full recovery will be slow and progressive," Mittal told a packed audience at the Steel Survival Strategies conference in New York. The issue of when the steel industry might recover from the devastating drop in demand caused by the global recession permeated discussions at the annual gathering of industry executives. Most agreed a rebound in steel markets will be gradual, with Mittal and others suggesting that strong, stable demand may not return until 2011. The major question remains where demand will settle when the economy finally recovers. Though North American mills churned out steel at record rates in 2008, analysts have suggested major restructuring in the automotive sector and other industries means those rates may not return for years, if ever -- raising the possibility of permanent mill closures. ArcelorMittal -- which closed plants in Hennepin, Ill. and Lackawanna, N.Y., in the wake of the downturn -- is not "permanently shutting" any other plants in North America, Mittal said in an interview. U.S. Steel CEO John Surma said his firm will make "a bit more steel" in response to improved demand, but noted "what level of demand is sustainable is unclear, particularly with difficulties in the automotive sector and housing markets." "Does that argue for permanent reductions in capacity?" he said. "While we are studying all aspects of this issue, we're not prepared to do that, at this point." Demand for steel plunged in the fall, leading many steelmakers to curtail production by idling mills and cutting workers. U.S. Steel temporarily shut the former Stelco plants in Hamilton and Nanticoke. ArcelorMittal Dofasco maintained its permanent staff but slashed production and cut temporary workers. Overall, ArcelorMittal has found market conditions to be stronger in Canada than in the U.S., said Lou Schorsch, CEO of the firm's flat steel division in the Americas. "(Dofasco) has a good cost position and it's primarily serving the Canadian market," Schorsch said. "And I think the Canadian economy is operating at a better rate. Steel demand is a little better than you have in the United States." Surma did not comment on why U.S. Steel recently recalled 800 laid-off workers in Hamilton or whether his firm intends to restart steelmaking at Hamilton Steel. Union leaders have said the workers were recalled so U.S. Steel can avoid government legislation that would require it to put aside about $15 million in severance pay for workers. Surma did say the Canadian shutdown was not a response to Buy America legislation that requires all steel used in American infrastructure projects to be made in the United States. U.S. Steel makes operational decisions "day to day" based on demand, he said. "We hope to have everything running eventually like we did last summer when everybody was having a much better time of it than we are today," he said. Just how "real" the current increase in North American demand is remains a matter of debate. Steel customers have been working through existing inventories rather than buying steel. Though that "destocking" is now almost complete, analysts say, the markets for cars and other manufactured goods remain depressed. And serious questions remain about the long-term prospects of the U.S. auto industry. Baby boomers are expected to buy fewer cars as they move into retirement, and if successful, the U.S. government's push for smaller, more fuel-efficient cars could lead to a decline in the amount of steel used by the industry. That could place serious pressure on the steel companies that supply the Detroit Three automakers, said Karlis Kirsis, managing partner of the research firm World Steel Dynamics. "If the government is successful in moving Americans to small cars, there will be an overcapacity problem," he said. "SUVs consume three times as much steel." Any major growth in the auto and steel industries is expected to occur in the emerging markets of China and India, not North America, where a return to average consumption rates of 130 million tons a year may not be possible. "I don't have a crystal ball but I'll tell you the 130 million tons of demand that we've enjoyed for the last several years -- well, it's going to be very many years before that returns," said Keith Earl Busse, CEO of Indiana-based Steel Dynamics Inc. "I suspect in the future we might well be looking at steel demand that's 110 million tons."