December ISM Survey - What Economic Recovery?

Includes: MT, NUE, X
by: Michelle Galanter Applebaum

Industry Outlook Deteriorates. The December Institute of Supply Management survey reflects far more pessimism among respondents this month than November and the few promising signs of last month’s survey have vanished. Not since last May have steel buyers viewed their inventory levels so overstocked, with 44% of respondents saying their inventory levels are too high to meet demand and 51% reporting they plan to reduce inventories in the next six months. The outlook for sales has become more pessimistic as well, with some 41% expecting lower receipts in the next three months, up sharply from 21% last month.

Uncertain Market Conditions Causing Inconsistencies. The report indicates a high degree of uncertainty in the market. Some 32% of steel buyers expect the trend of general economic activity to be down in the next three months, up significantly from 7% in November; yet the number expecting activity to trend up rose from 21% to 27% in December – fewer respondents selected “flat”. Expectations about players own incoming orders also showed a contradiction as well as steel buyers expecting an increase in the next three months rose from 21% to 27% yet those expecting a decrease also rose, climbing from 29% to 38%. So the market is increasingly uncertain.

Nominal Increase in Foreign Interest. The December survey indicates that foreign steel is becoming nominally more attractive, as those who believe foreign steel prices are above domestic levels fell from 17% to 12% and steel buyers who believe foreign mills are more active in seeking US business rose from 9% to 23%. This is surprising as domestic steel prices reached remarkably low levels relative to the rest of the world in December. With domestic steel prices now back on the rise to catch up to surging global prices, we expect to see some pickup in import pressure in the coming months.

Outlook. We believe the data suggests that while steel producers have depleted their inventories, there most probably was some pickup in November/December and buyers are increasingly worried about their own demand. We believe that steel demand in the US will remain stable, but availability of foreign steel will continue to decline in the coming months, pushing domestic prices still higher.

Disclosure: NA