I recently spoke with a representative of an Asian steel mill who had asked me, “Do you think we are at the bottom yet for steel?” Interesting question considering he comes from a steel mill and well, we just assist manufacturers with their steel purchases. Though I started to give that reply, I couldn’t help but say, “do you really think this is bottom? I don’t, not for a second.” There are interesting psychological games that mills and suppliers are playing these days. I suspect most of those games are meant to simulate the ‘Great Oz’ but in reality, it’s a lot of smoke and mirrors. The slide in all metals does not appear to have touched bottom yet.
Our beloved web designer couldn’t even resist forwarding me this article discussing the recent layoffs at Rio Tinto of 14,000 jobs. But unlike some of its competitors, Rio Tinto’s rationale behind the cuts relates more to the company’s need to reduce debt and re-position itself better for the next economic recovery. In addition to iron ore, Rio Tinto also has large aluminum and copper mining operations.
Meanwhile, Cliffs Natural Resources (formerly Cleveland Cliffs) has reduced capacity at six of it’s North American mines “due to market uncertainty,” according to this recent Mineweb article. And though Cliffs has contracts for about 75% of its production for 2009, the fact that the US steel industry is operating at or about 50% capacity raises the question, will Cliffs be able to count on the contracts placed previously, when the market was much higher? According to the American Iron & Steel Institute, AISI, “In the week ending December 6, 2008, domestic raw steel production was 1,182,000 net tons while the capability utilization rate was 49.5 percent.”
The mining industry cuts do raise another question. Are the cuts deep enough to sustain profitable operations with steel capacity utilization rates at less than 50%? Last year at this time, capacity utilization reached 88.1%. We’re keeping our eyes wide open looking for signals that we have hit the floor. We don’t think we’re there yet…