Is steel the harbinger of a major industrial surge in 2012?

BY MORRIS BECHLOSS
PVF and economic analyst emeritus

The U.S. steel industry has always been one of the most reliable indicators of what lies ahead for the American industrial sector. Having reached its peak of 150 million tons in 1950, steel production has been headed downward at an accelerating pace since, reaching barely a third of its previous record as the millennium turned over 12 years ago.

But this gloomy scenario seems to be changing, as the once dormant, but now reawakening backbone of America’s former global industrial superiority is showing signs of renewed life. Latest figures support this contention. Total shipments by U.S. steel plants reached 76.4 million tons in the first 10 months of 2011. This is up from 69.7 million tons during the same period in 2010, which itself was an improvement over 2009. Even escalating steel imports have risen 14.5% over the previous year, with prices rising accordingly.

The strongest end-use markets, by far, have been the rebound of this nation’s automotive sector. Against all earlier prognostications, U.S. automakers unexpectedly amassed 13.5 million vehicles in 2011, a 30% increase over 2010. Such steel components as strip and coiled plate steel, used to make cars, were up in the double digits over 2010.

World steel prices, in light of these soaring U.S. activities, have been on the rise since the first part of 2011, when they were dropping. They have risen by 25% since early in November. Mills are now charging $750 a ton for hot-rolled steel, up from the previous $600 several months ago. This is already impacting such end-use products as automobiles, washing machines and construction components.

Equally strong was the energy sector. Natural gas and oil producers were especially prolific, buying up steel pipe, fittings and flanges at a rate not seen since the “fossil fuel” boomlet in the early part of the previous decade. Total shipments of steel pipe, especially, surmounted the equivalent 10 months of October 2010 by almost 25%.

Much of the surging energy sector activity came as the result of natural gas and oil “fracking.” This renascent activity has proven bullish for U.S.-based steel producers in the past year, with no letup in the cards as 2012 enters its initial stages.

Indian/French Arcelor Mittal and Brazil’s Gerdau, S.A., among the world’s leading steel producers, are both planning to expand their American plant operations this year.

Brazil’s Gerdau, which concentrates on aerospace and defense sub-sectors, is expanding production at their Monroe, Michigan, operations. Russia’s OAO Severstal recently opened an expanded plant facility in Columbus, Ohio — a $550-million project that doubled annual capacity to 3.4 million tons.

All-in-all, this is good news for the revived U.S. industrial sector, which should be enjoying a landmark comeback this year, not seen since the mid-1990s.

Is U.S. coal utilization age coming to an end?

King Coal, the resource that dominated the powering of America’s vast electric utilities infrastructure for more than a century, is facing its terminus. Until recently, over 60% of the nation’s hundreds of power plants depended on coal as the most cost-effective method for supplying the increasing demand for electric power by industrial, commercial and residential users alike.

There are two major reasons for termination of a natural resource whose potential reserves supply in the U.S. top all other world nations. These are as follows:

• The Environmental Protection Agency (EPA) has become more determined than ever to put fossil fuels in the past. Its ever-tightening, new EPA-issued air-pollution regulations include severe limits on mercury and other emissions related to coal burning which have put electricity generating utilities in a bind. This practically insures the ultimate elimination of coal usage by America's utilities in the foreseeable future. Currently, most of the big utilities have announced retirement of coal-burning power plants. Others are already underway.

Fading coal consumption by the power sector, accelerated by the EPA’s constant vigilance, is expected to have receded by 2% in 2011 and 4% in 2012. This is only the beginning of a relapsing downfall from the 92% of the billion tons of coal used in America in 2010 for distribution to electric utilities. Predictions estimate that up to 20% of U.S. coal-fired generating capacity will get shut down by the year 2016.

• Helping to further expedite the exit of coal from the utilities’ power generating scene is the revolutionary breakthrough of the production of natural gas by hydraulic fracturing. Natural gas has become so cheap and overabundant that it is rapidly replacing coal as the accepted alternative. Although not appreciated by the EPA, which is totally involved with the nebulous idea of renewable energy, natural gas generation cuts carbon dioxide to half of the amount attributed to coal. For now, this substitution has stayed the hand of the EPA, which is not yet ready for a showdown with natural gas, while making sure that coal is banished completely from utilities’ power generation.

Those who may believe that America’s world-leading coal reserves are being consigned to oblivion have not counted on the massive demand from abroad for coal, especially from China and India. This unquenchable thirst for U.S. coal supplies has become an increasing revenue-generating mechanism for the current, flourishing export sector, where environmental regulations are much more lax.

U.S. energy independence approaches verge of reality

While hydraulic fracturing (fracking) has as yet not become a household word, it has rapidly entered the gateway to oil independence long promised by a succession of U.S. presidents.

It’s the ultimate irony that the inevitability of such an exciting possibility is being opposed by the Obama administration’s “renewable energy” commitments and underpinned by the EPA, whose main objective has become eliminating coal-fired power generation, and which keeps a close eye on natural gas. Next in line would be the substitution of oil derivatives to power automotive vehicles, through replacement by electric-powered cars

Nuclear energy, whose new site expansion has lain dormant since the 1979 Three Mile Island near-meltdown, followed by the 1986 Chernobyl disaster, has found the final nail-in-the-coffin to be the March 2011 Japanese Fukiyama earthquake and tsunami. Other than expansion on-site, no additions to the dormant 104 generating stations will be contemplated in the U.S. in the foreseeable future.

What is particularly frustrating about EPA’s threat to disallow further fracking expansion or to stop current activity pending more examinaion of effluence and other climatic interpretations is that natural gas has already achieved total domestic demand satisfaction and is in the doorway to become an export possibility.

However, oil, which has seen major breakthroughs through the fracking of shale deposits, launched only recently in North Dakota, New York, Pennsylvania and Texas, is already generating an additional one million barrels daily. This translates into a major addition to the five million extracted barrels per day previously existing.

The low point of demand of 18.5 million barrels now needed in today’s less-than-robust U.S. economy has still left the U.S. dependent on almost 12 million imported barrels per day, weighing on our still gaping trade deficit. The high point had been 22 million barrels a day in 2005.

With the current price of U.S. “sweet” West Texas Intermediate prices hanging in at $100, the profit margins for the rapidly evolving fracking technology are considered eminently profitable.

The outcome of the November 2012 general elections will determine how the energy sector will shaek out during the next few years.

America’s runaway debt collateralized by all-time high assets

One of the unexpected surprises in the unprecedented expansion of America’s national debt— expected to exceed $17 trillion in 2012 — is that it continues to elicit exceptional buying coverage along the entire yield curve in Treasury auctions, held several times a week throughout the year.

Although the Federal Reserve stands ready to jump in if coverage and bids are insufficient to keep yields down to a level in line with the Fed’s low-ball interest rate commitment through mid-2013, the bulk of the U.S. Treasury’s debt paper is sufficiently covered by global investors, domestic and foreign.

This is not especially surprising, when considering the exceptional reputation of the U.S., even as it has become the world’s major debtor nation. This is because America is still the most politically and financially responsible world governmental entity, promptly paying interest and return of principal since the origin of America’s participation in world markets more than 200 years ago. Such confidence is justified.

The U.S. also possesses an unlimited asset base, far beyond the reach of any of its current gross domestic product of goods and services competitors, having reached a per capita GDP of over $45,000 per person. This is only exceeded by a handful of small national entities such as Norway, which has a small population and relies on a glut of oil.

Although the growth of the world’s leading also-rans — China, India, Japan, Germany— have logged impressive growth performances in the last 25 years, they are no match for the sheer resource power of the U.S. This would include not only the output of today’s American economy, despite the restraints which it is now undergoing, but also the balance between its industry, services, agricultural and technology and its still untouched potential of natural resources, which is unmatched anywhere in the world. Adding the productivity and skills of its 150 million-plus workers, the ingredients of future growth are in place for an impressive upward breakout in the foreseeable future.

It may come as a surprise to many that the U.S. has almost doubled its gross domestic product revenues to over $15 trillion since the turn of the current millennium. This is amazing, happening despite two recessions, two foreign wars, a global terrorist confrontation and an increasingly dysfunctional political system.

Casting a bright light on an optimistic future outlook is the embryonic development of an unlimited fossil fuel production expansion, an overabundance of other natural resources and an unmatched technological evolution that could exceed anything previously accomplished in America’s ascendance to world leadership.

Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.