Steel goes into buildings, appliances, and cars. That makes demand for steel a leading indicator for the economy since companies order steel in antipication of rising sales of their own products.
This summer global demand moved up and so did prices. In August a metric ton of hot-rolled steel went for $600 to $620 a ton. Rising steel prices on rising demand provided a sign that the global economy was headed for recovery.
Now prices have dropped back to $570 a ton, according to World Steel Dynamics.
Does that mean that we’re headed back towards recession again?
What’s clear is that demand hasn’t grown as fast as steel makers ancipated. Looking at stimulus plans from Beijing to Berlin, steel makers from ArcelorMittal (MT), the world’s largest steel maker to Baosteel Group, China’s largest steel maker, fired up idled mills.
ArcelorMittal, for example, had cut production by about 30% in 2008. But in 2009 the company and much of the rest of the global industry have been restarting some of their mills.
Too much capacity went back into production too fast–and steel prices are now correcting to reflect that.
What’s not so clear is whether the recent drop in steel prices is just a temporary pause while demand catches up to supply or a sign that much of the demand for steel this year wasn’t a sign of economic recovery but simply temporary restocking by companies that had drawn down inventory.
This isn’t a new question for the global economy. The jury is still out about how sustained the pickup in demand for commodities from iron ore to copper to steel really is.
In a sustained economic downturn like one that may now be ending companies typically put off re-ordering raw materials and restocking their shelves. Instead they use up or sell what they have in hand in their inventories and only reorder when those inventories are depleted.
Sometimes–usually in relatively mild recesssions–this inventory restocking is itself enough to get the economy going again.
In a deep recession like this one, though, companies that have restocked may decide to drawn down their inventories again rather than risking a return to normal ordering patterns and normal high levels of inventory.
The risk of running out of raw materials or stuff to sell is less than the risk of getting stuck with hugh piles of raw materials or consumer goods that just sit there gathering dust and eating away at the bottom line.
In that case instead of steadily rising demand the economy sees a series of starts and stops that keep it sputtering but that aren’t enough to make the engine turnover and catch fire.
Watch steel prices (and the price for iron ore, the key raw material for steel makers) to see whether economic demand is indeed picking up–in which cases prices should rebound from their recent decline–or whether we’re headed for a dip back towards recession.
Nobody ever said these weren’t interesting times for the global economy.
I listned to a wise man, who said we traded the flue today for cancer tomorrow. What he ment was we borrowed our way out of this collaps, only to dig our way in depper.
However it seems we didnt borrow our way out, but rather Goldman sachs put a high speed trading hook into the market’s mouth, and simply dragged it up, and every time it trys to go down, GS drags it back up again.
Steel, well, maybe it went up, cause folks saw the market going up, so they bought steel, and now reality is showing it’s ugly face, so steel is coming back down.
The truth is, consumer spending is in the toilet, they expect a terrible Christmas season, China has borrowed to drive it’s economy, the USAis the only global consumer nbation, and USA needs debt to buy…. and the only equity Americans have left are their houses, and house prices are falling, and the powers say we will see another 25% drop..
AND THE MARKET IS GOING UP LIKE CRAZY AND IT SHOWS NO SIGNS OF EVER COMING BACK DOWN !
Jim posted an article in Feb 2008 about the impending pension crisis which is still playing out. The article ( which was a full 6 months prior ) was errily acurate as to the financial crisis and susequent bailouts. I’m wondering about Jim’s ( or everyone else’s ) thoughts about the ongoing pension issue as well as potential for a double dip recession. Isn’t the second dip always the worst? I saw Gietner grinning at a town hall meeting last night. It was Deja Vu of “Mission Accomplished”.
BDI is the best indicator, and right now it does not look good.
The reason these are “interesting times for investors” is because we’ve not been down this road before, well, maybe a similar road, but the “weeds” and landscape are a little different. I can’t remember a time when the talking heads weighed in the arena in glorious fashion. Many of them are missing it. The market will continue to rise for a while. Jim and a couple of others have it about right…WATCH THE DOLLAR, INFLATION and comodity prices connected with steel, food and oil! If that won’t give you a headache, it will make you dizzy.
I’m curious as to how the capacity of empty buildings would play in to this. An awful lot of half empty shopping centers & office buildings seem to me, would/are create(ing) a glut of inventory, or more specifically no real need to build anytime soon. Thus pushing down prices.
Are there any other commodities that could be leading indicators for the economy? I thought I read somewhere that sulfuric acid could be used as an indicator because it is used in many manufacturing processes.