Vox: Steel industry
From Thursday's Globe and Mail
U.S. President George Bush hasn't won the war on steel, but he has made some inroads. Investors seem to be starting to register their confidence by bidding up steel stocks.
Mr. Bush says the steel industry is vital to the United States. That's hotly debatable, given that car makers and other steel consumers can buy their metal from foreigners for far less than they can from domestic mills. What is vital is the votes of hundreds of thousands of steel workers, current and retired.
It's no wonder the President has taken such a firm stand on steel output. When government and industry representatives met in Paris last month, Mr. Bush flexed his muscle, demanding capacity cuts and threatening to close the U.S. market to imports if he didn't get his way.
He got half of what he asked for, an agreement among producers to cut capacity by 97.5 million tons by 2010. But in the cold, grey world of steel, it was a subtle hue of comfort.
There are questions about what the agreement can accomplish. Global steel capacity is roughly one billion tons annually, but only 840 million tons are produced. Capacity could be cut by 160 million tons without denting production. It might be argued that the capacity cuts won't have any effect unless demand, which is now 5 per cent lower than supply, grows.
But the big players are motivated. Europe is terrified, because if the United States erects a tariff wall, the excess steel will be dumped on the continent. That may explain why the European Union was the only player to put an actual figure on its cutback commitment.
Other producers — Ukraine, South Korea, Russia — also have reason to please the Americans. But they have demands of their own, namely that the U.S. industry clean up its act as well.
That's happening, as it turns out, of its own volition. The U.S. industry has suffered 28 bankruptcies or Chapter 11 applications since 1997, representing about 40 million tons of capacity. The United States is targeting a further 14 million to 17 million tonnes of capacity cuts by the end of this year.
LTV, the fourth-biggest concern, is finished. A proposed megamerger may see three other big players consolidate, making capacity cuts easier.
In a cruel twist, one of the biggest liabilities facing U.S. (and some Canadian) steel firms is retirement benefits. The industry has approached Congress, cap in hand, asking for $13-billion (U.S.) to address that issue. Observers doubt the government will pay that, but some form of support is possible.
The bottom line is that a global restructuring of the steel industry seems finally under way and that pricing should rebound. Obviously, economic conditions will still exert a cyclical influence on steel earnings, but it seems safe to assume that steel prices are near the bottom. Assuming a cyclical turn in stock prices and a modest improvement to multiples, steel stocks look promising. The quality names have performed well recently, but the risk-reward profiles on lesser names are improving.
globeandmail.com |
