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NASPD 2012 Annual Conference addresses major roadblocks to a sustained US recovery

Tuesday, 28 February 2012 23:36:43 (GMT+3)   |  

While Andy Mervis, President and CEO of Mervis Industries, said during the NASPD conference in San Diego, California on February 24 that US domestic scrap prices will almost certainly go sideways in March, right now a lot of prime grade scrap is being imported from Northern Europe. As for obsolete scrap, Turkish mills had been mainly active in Northern Europe but have been coming back to the US recently to fulfill their scrap requirements because of Europe's harsh winter, which has left Europe "relatively clean of scrap." In contrast, the US' Midwest and East Coast regions have seen the mildest winter in quite some time and flows are decent given a weak scrap backlog. As a result, scrap prices may not fall in April. The biggest factor now that will affect domestic prices is overseas demand. While it's not a new factor, Mervis said, it's a much more important factor.

As natural gas prices become cheaper, he added, the US will see more scrap substitute plants, like Nucor's DRI plant currently under construction in Louisiana, being built. Supply and demand is in balance in the US as the economy is improving, he explained, but the lack of home construction means there is less scrap from appliances so scrap availability will remain fairly tight. The availability of adequate transportation to move scrap at affordable prices remains a challenge, and if we don't get enough rain, he remarked, we'll see low water levels in the Mississippi River and in St. Louis, and then it will become a problem for barge traffic.

Next up during the conference session were trade attorneys Lewis Leibowitz, partner in Hogan Lovells, and Roger Schagrin of Schagrin Associates, who debated the current state of the US' trade policy. The trade panel was moderated by Mike Evans of Maurice Pincoffs Company, Inc. Schagrin began by exclaiming that the biggest problem the US has is that it has no trade policy; in Washington, while the US does have an energy policy, it's the wrong policy. He begged the question: "Should we embrace capitalism and fight government control or turn Washington into a government that makes the choices instead of the private sector?"

According to Schagrin, there is a clear relationship between the US' twin deficits: the budget and the trade deficit. The trade deficit sucks out revenues from the US and takes them to other countries. We cannot bring down the budget deficit if we do not bring down the trade deficit, he said, "so why isn't there more conversation about the trade deficit?" The US has a $295 million trade deficit with China alone, and oil imports make up the rest. President Obama's singular trade policy has been to double exports in the next five years, he explained, but what about the goal on imports? "When it comes to China, we have to insist that currency regulation stops...can't have trade and let the second biggest economy have currency regulation." Schagrin concluded by insisting the US needs an energy policy; currently we take tax dollars to build wind towers, etc., but "we need to let the markets work themselves."

Following Schagrin, Leibowitz voiced his disagreement that the US doesn't have a trade policy. "The US does have a trade policy, but it's just one that Roger doesn't like." However, the US trade policy can be described in one word: vacillation. Leibowitz stressed the importance of foreign investment, noting that "we want US companies to invest overseas and we want overseas companies to invest [in the US]." China is in the WTO and they break the rules, "but so do we," he explained. The US also has three new trade agreements (with Colombia, Korea, and Panama).

Two-thirds of the US' imports are intermediate goods--"do we really want to get rid of them?"Leibowitz asked, emphasizing that the US could not export many of the finished goods it produces if we were to cut off imports of those intermediate goods.

Other major developments in the US' trade policy have been the elimination of zeroing and the GPX case, which determined that countervailing duty (CVD) laws cannot apply to non-market economies like China and Vietnam. When dumping duties are more than 100 percent, as many of the duties on Chinese goods are, there is no need for a CVD as well. On average, Chinese anti-dumping rates are 166.09 percent and CVD rates are 60.66 percent. Duties should reflect the accurate amount--anti-dumping duties should not stop trade entirely, according to Leibowitz.
"The one thing Roger was right about is that we still have a lot of work to do," he added. The trade deficit is a result of our society saving too little and spending too much. Jobs are important and will increase the more we trade and depend on our own innovation. "Protectionism is not the way to go," Leibowitz concluded.

During the question-and-answer portion of the panel, Schagrin referenced the 3 million mt of OCTG that came to the US from China a few years ago. "Is that helping America?" he asked. Now we're seeing more tons arriving from Vietnam, he said, and questioned whether or not the pipe is really from Vietnam or from China. "It's probably Chinese," he said. If the US experiences any kind of downturn in oil drilling, and 300,000 tons of OCTG imports arrive in the US like they did in January, "we could very well have more trade cases."

Leibowitz argued that "Roger doesn't pay attention to the hard question: if less OCTG is coming in, there will be less drilling activity because it will cost more to build a well. Now that'll move the market."

Regarding the importance of productivity versus the issue of currency manipulation and cheap Chinese imports, "productivity is vastly more important than the China factor," Leibowitz said. Schagrin disputed that both are important and about 40 percent of everything consumed in the US is imported and "that's way too high a number." Schagrin added that the US "loves" getting auto parts from China because it's cheaper and disagreed with "this idea that we benefit from Chinese imports...we did fine before and we can do find without it."

Conversely, Leibowitz said that "we can't go back to the way things were and that's a good thing."

Afterward, a "State of the Industry" presentation by Keith Busse, CEO of Steel Dynamics, focused on the US' major economic challenges, but Busse first addressed the discussion between Roger Schagrin and Lewis Leibowitz. Busse agreed that the US needs an energy policy "and we need one in a hurry." Currency cannot be abusive and there cannot be subsidies. The US also needs to export more in order to alleviate the trade deficit.

With regards to the US economy, Busse said that the US GDP grew 1.7 percent in 2011, with Q4 2011 growth of 2.8 percent. In 2012, GDP growth is anticipated to be around 2 percent after 3 percent growth in 2010 and a contracting GDP in 2008 and 2009. While there are some encouraging signs, such as strengthening auto demand, construction spending is still weak; although the non-residential construction market is improving, "residential construction is still in shambles." With the US' still underlying weak economy, it "seems like the turn is always two quarters away," Busse said.

As for the US steel market, in 2011, steel demand amounted to an estimated 93 million tons. That number is expected to increase to 100 million tons in 2012; 111 million tons in 2013; 118 million tons in 2014; and 120 million tons in 2015. The US steel industry is under pressure from underused capacity and new supply coming on line in some product sectors, he added.

There are certainly risks to the US' continued recovery, including: the lack of an energy policy, crushing national debt, high unemployment, uncertain healthcare reform, a tax burden on corporations and individuals, currency issues and an uncertain political outlook. Regarding the tax burden, Busse noted that "I'm a flat tax guy...because that spurs economic growth--may the best man win." Politically, he conceded that if we continue with the policies currently in place, it's going to be an excruciatingly long recovery. The 2012 election will be one of the most critical elections of our time, as the US cannot continue to support its social programs without a greater volume of revenue.


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