Oil Price Fails to Dent Steelmakers
HAMILTON, ONTARIO, CANADA
THE immediate outlook for the Stelco Steel Company is not bright. High interest rates, the high value of the Canadian dollar, and a long strike had already dimmed the picture. Now rising oil prices further darken the horizon. But Stelco Steel President Fred Telmer is cautiously optimistic: ``I think there are some opportunities.''
If that's the mood at Stelco, which faces perhaps the rockiest road in the steel business, then the rest of the North American industry can breathe a little easier. The high price of oil threatens to dent the North American steel market, but it won't create a head-on collision, analysts say.
``Under normal conditions, it would be a definite minus for the industry,'' says Christopher Plummer, a steel analyst with the WEFA Group, an economic forecasting firm outside Philadelphia. But these are not normal times.
The auto industry is stockpiling steel in case of a strike when the contract runs out this Friday. The Canadian strike at Stelco has pushed some business to United States companies. So, through most of August, US steel manufacturers were running at close to 90 percent capacity.
Eventually, higher oil prices will slow the economy and, thus, slow the steel business, economic forecasters say. Consumers won't spend as much on automobiles, appliances, and other goods that use a lot of steel. Construction will also slow.
Through the end of this year, analysts are predicting US companies will ship anywhere from 81 million to 84 million tons of steel, which is at or a little below the levels of the past two years. Most analysts predict the steel business will dip somewhat next year, presuming the current standoff in the Middle East continues to keep oil prices high and volatile. That outlook is not unlike the prospects of a mild slump for the economy as a whole.
US steel shipments could drop to 78.5 million tons next year, assuming the Middle East standoff is not resolved, says Walter Carter, vice-president and steel analyst at DRI/McGraw-Hill, an economic forecasting firm outside Boston.
Peter Anker, a respected metals analyst at First Boston Corporation, is more optimistic. ``I am not sure it's going to be down next year.... The US market is in a good position to sell steel.''
For example, while US auto sales have slumped, foreign cars made in North America continue to sell, he says. Their manufacturers use large amounts of US and Canadian steel. The low value of the US dollar has slowed steel imports and made US steel more competitive in foreign markets.
None of these analysts expect the industry to repeat the wrenching downturn of the early 1980s, because it has restructured itself dramatically. It continues to modernize. Last Friday, for example, Pittsburgh-based USX Corporation broke ground for an advanced steel caster in one of its historic plants near Pittsburgh. The companies have also rebounded financially. Despite generally weak steel prices just now, analysts say that all the large integrated steel companies should survive the mild downturn.
``They can go in a slow steel environment for quite a while before they get to the edge'' financially, says Jeffrey Miller, a steel analyst with Duff & Phelps Inc. in Chicago.
Any downturn in consumer products will likely swamp the potential gains in the much smaller energy-related steel business. For example: USX is a major producer of pipe and tubular steel for the oil and gas industry, but those sales only accounted for 8.7 percent of its total business last year. And so far, the oil industry is not jumping into new projects until the price of oil stabilizes.
``Right now it's a little more of a wait-and-see attitude,'' says Mike Kraska, spokesman for CF&I Steel Corporation. ``What the oil companies are waiting to see is where this is going to level out.''
The Pueblo, Colo., company serves the energy and railroad industries. Should its oil industry customers see oil prices stabilizing at a high level, then CF&I could benefit handsomely. If the price falls back to $20, then the company faces continued trouble. For the first half of this year, it lost $9 million on sales of $150 million.
For his part, Mr. Telmer of Stelco says stable and high oil prices would be a net plus for his company. The company is a producer of pipe and other products for the oil and gas industry. And he expects further business from US energy companies, as the country takes a close look at its reliance on foreign oil.
``The lesson of how much dependency the US has on foreign oil will not go unnoticed,'' he says.