ANALYSIS-Searching for signs of a real steel recovery

Published: 27 Oct 2009 18:56:33 PST

* Europe, N. American producers struggling

* Analysts see little improvement soon

* China, India steelmakers booming

NEW YORK, Oct 27 - Steelmakers have been swimming in red ink for the past year and there is little indication that many of the producers in the developed world will be back in the black soon, analysts say.

The world's largest steel producer, ArcelorMittal is expected to post a fourth consecutive quarterly loss on Wednesday, days after U.S. Steel posted a third straight quarterly loss and Japan's JFE Holdings said the market was too fragile to update its own earnings outlook.

In contrast, steelmakers in India and China are booming as industrial activity in the developing world has surged back after the economic downturn last year dried up demand.

In Europe, North America and the developed economies of Japan and Korea, steelmakers are only slowly increasing production that some of them cut by more than half a year ago. Although they are finally selling some steel again, it is mostly to replenish stockpiles of service centers -- middlemen who process the metal for specific customer needs.

Dan DiMicco, chief executive of Nucor Corp, which posted a third consecutive quarterly loss last week, was blunt. "There has been no meaningful real improvement in end-use demand."

THE GREAT DIVIDE

Siddhartha Sengupta, managing consultant of Hatch Beddows said in London there is a divide in the global steel industry.

"The Asian steel industry has recovered and will continue to do so in the next 2-3 years.

"In Europe and North America, while some recovery in demand could be expected from next year, it is not likely that demand will recover back to 2008 levels -- even in 2012," he said.

And Paul Scott, managing consultant at CRU's Steel Business Unit in London, questioned the sustainability of the recent improvement in U.S. mill orders.

"Once service center restocking has taken place and downstream supply chains have been replenished we see nothing to underpin a further, meaningful improvement of the order books of U.S. mills until 2011."

Asked to characterize the steel industry right now, Charles Bradford, of New York's Affiliated Research Group, said it was "very nervous and concerned, they are not seeing economic recovery.

"Most companies will do better in the third quarter than they did in the second, but some will still lose money, like U.S. Steel and Gerdau (AmeriSteel Corp)."

AN UNCERTAIN OUTLOOK

Last week, the steel industry body Eurofer said the EU steel market will be slow to recover, even after the region's economy starts to grow again.

It said the forecast for coming quarters would be slow and fraught with uncertainty as prospects for the EU's steel-using sectors -- like autos and construction -- remained dim.

"While the economy probably reached a turning point, the EU steel market will remain stuck in slow motion for the time being," Eurofer Director General Gordon Moffat said in a report on the market outlook for 2009 to 2011.

Eurofer President Wolfgang Eder also struck a downbeat note, with fears China could damage the delicate stabilization in the market by ramping up exports as domestic demand slows.

Eurofer's report said weak activity in Europe's steel sector had brought a slump in demand as consumption fell 45 percent year-on-year in the first half of 2009 and by almost 32 percent in the third quarter.

"Overall it is on very, very thin ice. We fear that there will be huge exports out of China in the first half of the year," Eder said.

Andrew Snowdowne, of UBS in London, said he expected western steelmakers to highlight stronger fourth-quarter results, but cite a lack of visibility beyond that.

"We at UBS are expecting steel prices to continue to soften into the first quarter of next year. We think the supply reaction has been too aggressive relative to where real demand is, and so we're are relatively cautious," he said.

Meanwhile, Sajjan Jindal, managing director of India's JSW Steel Ltd, announced its net profit rose above market expectations on strong domestic demand and cost reductions.

The latest data from the World Steel Association show that global crude steel output fell 0.6 percent year-on-year to 107 million tonnes in September. In contrast, China's output surged 28.7 percent to 50.7 million tonnes.

Japan's steel production slid 18 percent to 8.3 million tonnes in September and South Korea showed a fall of 2.4 percent to 4.4 million tonnes.

U.S. output tumbled 31.4 percent to 5.4 million tonnes and the equivalent number for Germany was 3.2 million tonnes, down 21.7 percent from September 2008 and for France it was 1.3 million tonnes, a fall of 15.3 percent.

JSW's Jindal confirmed that location is everything in steel: "The demand for steel is very strong in India and China and so the steel industry continues to remain in a robust shape."