Steel manufacturing in the U.S., and in Alabama, has seen its ups and downs in the last few decades, as the import/export battle with foreign markets continues.
Steelmakers with a local presence, such as U.S. Steel (NYSE: X) and Nucor Steel (NYSE: NUE), have been warning investors of an economic downturn as a result of overproduction in China, but some economists believe the strength of the U.S. dollar could be contributing to the overcapacity of cheap steel flooding the global market, along with a major decline in crude oil prices.
Ahmad Ijaz, an economist at the Center for Business and Economic Research at the University of Alabama, said in an interview with the Birmingham Business Journal that the U.S. was faced with a similar situation in 1990s, when steel was at an overcapacity.
"The steel industry is very cyclical and goes through this every five or 10 years," Ijaz said. "There was an overcapacity of steel in the 1990s and it worked itself out. It depends a lot of construction, automobile production and things like that."
Industry Woes
While industry trends may be cyclical, the economic pains are definitely being felt in Birmingham, where 300 U.S. Steel workers were laid off last week, with another 1,500 waiting to get their pink slips following the end of the time limit on WARN notices given to 1,800 employees at the Fairfield Works in January.
As of Monday, U.S. Steel said no new layoffs had occurred in Birmingham. However, In Granite City, Ill., U.S. Steel last week laid off 2,000 employees at its facility, showing its attempt to scale back production on a national level.
Ijaz said the price of U.S.-made steel, compounded with a tradition of overproduction in China, will ultimately have a negative impact on the steel industry as a whole, making it difficult for firms like U.S. Steel to compete when the dollar is strong and domestic steel prices are high.
"Some of that could be due to a stronger dollar hurting the U.S. export of steel, but overcapacity in China has been the problem for the last five to 10 years," Ijaz said. "China has always overproduced and at some point, they had the demand to do it, but since their economy is slowing down, they may cut back, but what that does is lower the steel price in the world market."
Sara Robicheaux, dean of Business Programs and B.A. Monaghan Professor of Business at Birmingham-Southern College, told the BBJ that local manufacturers may be able to rebound, but will have to rethink production.
"This is not the first time nor will this be the last time that a strong dollar and cheaper manufacturing cost internationally have and will cause an impact on manufacturing in Alabama," she said. "The reduction in steel production will affect a number of jobs. However, the local economy will need to re-allocate financial and human capital as a result of changes in the international economy."
Variables, and effects on other Alabama sectors
Ijaz agreed with the possibility of a steel resurgence in Alabama, but said demand will have to pick back up first.
"I'm pretty sure at some point they will (rebound)," he said. "It's not just the production, it's also the demand side has slowed down a lot. Demand is slow because the overall consumption sector has slowed down in the rest of the world and that has a huge impact."
Both economic experts said the idling of steel production facilities in Alabama, and across the country, will have far-reaching effects into other sectors, due to industrial dependence on steel.
"The economy is interconnected and the effects on the steel industry in Alabama will trickle both positively and negatively into other sectors," Robicheaux said.
As China's economy grew in recent years, she said, more people became aware of the problems that can spur from government-subsidized industry.
"China’s steel industry has been growing significantly since the mid 1990s. Unfortunately, as early as 2009, many people began to be concerned that China’s production would have a negative impact on US steel production," she said.
Ijaz also said he is sure there is a trickle-down effect because other manufacturers have to buy their raw materials. This impact occurs, along with the fact that laying off workers has an impact on spending in the the overall economy.
Companies like U.S. Steel, who warned investors in January of the possible economic troubles ahead, were pushed out of markets in places like Canada, Japan and Europe, Ijaz said. If these markets can heal, he said the demand in U.S.-made steel will ultimately increase.
"We exported a lot of steel to Canada and some of the Asian markets like Japan and some of the European markets," Ijaz said. "That is one thing that is hurting U.S. Steel, since the dollar is relatively strong compared to other currencies, that makes the exports more expensive and hurts them."
Oil In The Background
Politics continue to dominate the discussion of why the U.S. steel industry is in the process of altering production, and one constant hot-button issue remains in conversation: oil.
Crude oil prices began to fall in mid 2014, and only sank further following OPEC's decision to opt against reducing production, according to a report from Yahoo Finance.
This resulted in energy companies, who account for 10 percent of business done with U.S. steel manufacturers, cutting back substantially, with the U.S. seeing its lowest oil rig count since 2009.
U.S. Steel dominates the U.S. market in terms of providing tubular goods to energy companies, but now energy companies are waiting for the market to correct itself before investing more capital in its ongoing projects, the report said.
The firm told investors in January that the low rigs counts and oil prices would directly affect production.
"During 2015, U. S. Steel anticipates adjusting operating levels at several of its tubular operations as declining oil prices and rig counts have reduced demand for (oil country tubular goods) products," the company said in its most recent disclosure.
U.S. Steel also said recent decreases in iron ore, natural gas and oil prices have placed downward pressure on steel prices. If prices decline on steel, the "profit margins on market-based indexed contracts and spot business will be reduced."
Source: Birmingham Business Journal
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