This is part one of a two part series.
We were musing the other day in the office ” given the current recession and some of the wider implications that perhaps we need to save more and borrow less what would the long term impact be on levels of metal consumption, energy demand and hence the whole industrial base of the USA? What if the days of conspicuous consumption are, if not at an end then at least, unlikely to come back as they were in the heady boom days of this decade? Sentiment has already moved against brash displays of wealth even while times were good. Sound far fetched? Well maybe but let’s for the sake of prompting some critical debate look at some of the possible outcomes from this recession and their implications.
First, let’s assume car production falls from 16 million units per annum in 2007 to 12 million. It is currently at 10 million units but we are in the depths of a recession and a 20% increase from here is entirely probable. Not only will the number of cars be reduced, but the type of cars being produced is already changing considerably. Down are the trucks, pick-ups and large SUV’s, in are family sized hybrids, smaller, lighter, less polluting and more fuel efficient compacts. We have seen figures for the amount of steel consumed by the auto industry in 2006/2007 that vary from 19 to 30 million tons annually. Let’s take the lower limit of 19m tons. A drop in production to 12 million units equates to a loss of nearly 5m tons. Of those12m units, let’s say the shift to lighter vehicles equates to a 30% reduction in steel demand. That’s an additional 4m tons, making a total of 9 million tons removed permanently from a total US production of about 100m tons, or a 9% reduction from cars alone. That combination of fewer and lighter vehicles could halve automotive steel consumption from the peaks seen during this decade.
Now let’s consider the housing market, a major driver of steel and copper consumption, not to mention lumber, manual and skilled labor and so on. House prices have dropped, house sales have dropped, new construction is down dramatically from the peak in mid 2005. What is the result ” are vast numbers of Americans without a home? No, no doubt homeless numbers may increase slightly but a massive drop in construction activity is more a reflection of people not upgrading to larger homes and not buying second or vacation homes. In a save more-borrow less environment, the main drivers of new construction will be greatly reduced. Even the move toward energy efficient homes could express itself as upgrading existing properties. Indeed that is where the Obama stimulus billions are focused – upgrading government and people’s homes to become more energy efficient. Returning to our tonnage model, construction represents about 20% of steel consumption in the USA. The construction industry has crashed. But suppose it comes back to two thirds of its previous level? That’s an additional 7m tons of demand lost, in addition to that lost due to cars above.
In a follow-up post we will look at the future of the energy industry, labor and the Asian Super-Cycle on the metals industries.