Steel outlook - 2nd half 2010 report - industry prospects.
The first quarter of 2010 provided strong evidence that the global economic recovery was getting strong traction in major emerging countries such as China, Brazil, and India, and in developed nations such as the U.K., United States, and EuroZone.
During January and February of 2010, it appeared that the worst of the financial crisis had been averted, and in the United States, the Federal Reserve was beginning to have talks behind closed doors concerning when it should begin returning monetary policy to normal conditions.
However, during March, April, and May the EuroZone Debt Crisis emerged not only as a problem but as a systemic risk to the well-being of the global economy.
Throughout the first 4 months of the year, investors sold the euro heavily against other currencies, but in May there was an all-out run on the euro as investors bid it down to multi-year lows versus the dollar at $1.1875.
During mid-May, there was a degree of fear and uncertainty in financial markets that had not been seen since the outset of the 2008 Global Credit Crisis. Finally, in a desperate move to save the EuroZone from complete collapse, the European Central Bank and International Monetary Fund stepped in and pledged bailout funds for Greece and other struggling EuroZone countries.
This move served to reassure markets that there would be no sovereign default in the near term, and some degree of calm returned to financial markets.
This incredible uncertainty that gripped financial markets and caused intense risk aversion during March, April, and May was followed in June and July by very poor economic data out of the United States.
In late July, Federal Reserve Chairman Ben Bernanke testified before Congress and stated the economic outlook for the United States is 'unusually uncertain'.
This lack of clarity out of the Federal Reserve has created great uncertainty once again in financial markets.
Currently, in August of 2010, the global economic recovery is slowing significantly, and this is causing major risks for the steel industry.
A slowing United States and Chinese economy, decreased public spending in the EuroZone and U.K., and general investor unease will most likely weigh on global economic growth throughout the second half of 2010, and the steel industry will most likely suffer due to significantly decreased demand.
United States
Demand for steel in the U.S. will most likely taper off in the second half of 2010. The length of time this decreased demand is present hinges heavily on the U.S.'s ability to rebound from its current economic slump.
The combination of high unemployment, low inflation, and very slow economic growth is an economic recipe for disaster - deflation.
If these deflationary fears do gain any substantial footing, this would be disastrous for the steel industry in the mid-term as prices and demand would fall significantly.
Also, credit markets in the U.S are still very tight and companies are facing significant challenges in obtaining necessary credit for expansion.
This tightened credit market will also serve to limit demand for raw materials.
EuroZone
EuroZone member countries have been big importers of steel in the previous decade due to growth and expansion, but that demand has now largely disappeared.
When Greece and other struggling EuroZone countries agreed to receive bailout funds from the EuroZone and International Monetary Fund, they were required to adopt very strict austerity measures, which basically means they had to make immediate drastic cuts to budgets deficits by reigning in government spending and cutting back in other areas.
These austerity measures will certainly weigh on demand for raw materials such as steel in the 2nd half of 2010 and probably well into 2011. These austerity measures are also expected to weigh on economic growth, which will have an even further negative effect on demand for raw materials.
Demand for steel will most likely be weaker in the EuroZone.
U.K.
Prime Minister Cameron was elected in England largely due to his promise to bring fiscal reform to the U.K. He has largely followed through on his promises, and the U.K. has tightened fiscal measures considerably in recent months, which is weighing on demand for raw materials.
Emerging Markets
This is the one bright spot for the steel industry in the 2nd half of 2010. India, China, and Brazil have recovered quite nicely from the worst of the global recession and each of these countries is moving forward, although at different speeds.
China is currently in a period of economic slow-down, but this slow-down is expected to be short-term; strong growth is expected to return during the 2nd half of 2010.
Demand for raw materials such as steel in India and Brazil is very strong and this demand should help fill the void left by industrialized nations in the 2nd half of 2010.
Overall, demand for raw materials will most likely remain subdued throughout the 2nd half of 2010, but demand in emerging market will help offset huge declines. Currency trading volatility also may help emerging markets purchase steel at discounted rates due to weak developed world currencies.
Written by guest contributor Jennifer Gorton from Forex Traders