CHICAGO | Some analysts said Thursday concerns abound in the North American steel industry, although signs point to a vastly improved operating environment now than in the deepest part of the recession.
The analysts spoke to steel industry executives and media at a conference hosted by industry publication, Steel Business Briefing, at the Drake Hotel. The conference continues today.
Mark Parr of KeyBanc Capital Markets, said in a presentation that steelmakers reduced production so far below peak production levels seen before the recession, that incremental improvements could swing fortunes of many companies.
"They really have set up an amazing recovery opportunity in the next few years," said Parr, managing director and equity research analyst.
The American Iron and Steel Institute estimated U.S. steel mills utilized about 70 percent of their capacity last week, which is more than double rates of a year ago.
Merger and acquisition activity will be elevated in the latter part of 2010 partially because of improved economic conditions, said Dan Sullivan, industrials group director for investment bank Houlihan Lokey. Sullivan said other reasons for a company to become a buyer and leave its "storm cellar" because of uncertain internal growth opportunities:improved access to capital and an ever-present rumor mill.
Although each individual purchase rumor may not be true, Sullivan said the fact that people are talking about it signifies an upbeat change in how they perceive the industry.
Steel analyst Timna Tanners of UBS Investment Research said one bright spot this year would be stimulus funds that could play a role in bolstering the industry. A large portion of funds earmarked for transportation and infrastructure projects went unspent last year, but a lion share of money could go into supporting steelmakers providing rebar for construction.
Sullivan said he's heard estimates that if a new bill authorizing funding for highway projects was passed later this year, at least $400 billion could be support these steel-intensive construction projects.
Tanners said steel prices could remain at levels higher than a year earlier because of tighter supplies of inputs such as iron ore and metallurgical coal.
While this development may benefit steel mills, Sullivan said steel buyers may bristle.
"Buyers don't like it too much, but they can't take on the risk of being stuck with product long-term," Sullivan said.
Tanners said the threat of a jobless economic recovery, a lack of credit availability, and the relationship between the U.S. dollar and Chinese currency remain major questions to the fortunes of the domestic industry.
The construction and automotive sectors are also expected to head in two different directions in the coming months.
Sullivan said that automakers producing between 15 and 17 million vehicles annually won't happen for a while.
Analysts agreed that nonresidential construction will remain fundamentally weak until 2011 and may finally show improvement the following year. Tanners said banks will be slow to lend in this sector, because the last round of loans that went bad for a lot of institutions were on construction projects.
Parr said steelmakers in 2011 should expect a higher tax environment because there are some tax breaks expiring that are unlikely to be renewed.
