Permanent or Temporary?
The answer, hardly comforting though still preliminary, seems to be that changes up and down the industrial metals supply chain are rooted in both cyclical and structural causes. The unprecedented, sluggish economic recovery since the 2008 recession has battered a good portion of service centers and their customers.
But equally significant, potentially longer lasting, disruptive changes in the supply chain are certainly having a profound impact as well. Channels of distribution are shifting, for example, with some end market users apparently bypassing their previous relationships with service centers and going directly to mills for product. End products and end markets are changing as well; the shift to using more aluminum, carbon fiber and lighter, stronger steel alloys in vehicles is only the most obvious example. New materials and alloys have been replacing steel in higher margin applications over the last nine years. And, of course, some manufacturing customers have moved out of the United States and Canada, taking their supply chains with them.
That also means that indirect steel imports have increased as well. A growing percentage of finished goods, especially it seems in the automotive, machinery, construction and appliance sectors, are made off shore using foreign-made steel and then imported into the United States and Canada. The latest figures we have on this trend from the American Iron and Steel Institute are for 2015, but they show a 3.5% increase in automotive imported steel content compared with the year before. Imported steel content in construction was up nearly 10% in the same period, and appliances made from imported tonnage increased 6.4% year over year. The key here is that each of these segments has shown steady imported content increases for at least the last five years.
Chinese overproduction and its defiance of international trade law with government subsidies and dumping of product has been an important factor in a weakening U.S. industry. And Chinese-fed global overcapacity, plus subsidies to keep inefficient mills open in European Union countries such as Italy and Belgium, have created an inventory of inefficient, idle and underused mills around the world that shows no sign of abating. According to The Economist, Julian Allwood at Cambridge University has thus concluded: “There will never be any need for these surplus mills to smelt new steel from iron ore, even as global demand for the metal grows.”
The general trends seem quite clear. MSCI’s ongoing research is designed to more specifically quantify their impacts across end use markets and products. But this new industrial supply chain environment will require changes in traditional business models and a level of resiliency, flexibility, and alert management that is unprecedented.