Ternium: Steel demand to return
Steel demand dropped to historic low levels in 2008-2009. Companies cut steel orders and decided to run through their inventory and raw materials before placing additional orders for materials and products. This created a big drop in the demand for steel.
Well we are now in 2010 and things are looking good for steel companies. A large part of this is because most companies have run through their inventories and now can’t go any lower. Also, the consumer demand has stabilized or increased. The steel companies are recovering and some are looking to expand.
Demand for steel around the world will rise 11 percent in 2010 as the global economy recovers, World Steel Association chairman Paolo Rocca said on Thursday.
Speaking at a Mexican steel event, Rocca said higher demand in North America would anchor the global increase. Rocca is also CEO of Argentine conglomerate Techint, which controls steel producer Tenaris.
Global steel makers have been bringing back capacity idled during the recession in anticipation that demand for steel will pick up this year.
In Mexico, steel companies may invest up to $10 billion over the next five years, which could increase capacity by up to 10 million tonnes, an industry official said.
Raul said the investments would largely come from major companies like AHMSA, Ternium, ArcelorMittal and Brazil’s Gerdau.
Now I don’t think we are back in 2006 or 2007 type of demand. Although 2010 will be better than the past 2 years and the irrational fear of the past two years is fading. The companies that are looking to grow in 2010 are actually positioning themselves for 2012 and thereafter.
Mexico now has capacity to produce around 22 million tonnes a year but in 2009 produced only 14 million tonnes as the country suffered a deep recession.
Gutierrez said the recovering economy would boost output this year to 15.8 million tonnes.
So even after the 2010 growth we are only looking at output of 16M tonnes. With capacity of 22M tonnes, you would question expansion of capacity. I think this is a good question but remember production of steel plants take a while. Also, you don’t want to start production or expansion of plants when you are already in the strong growth business cycle. You need to plan ahead and get yourself ready for the coming growth.
I think Ternium is very well positioned for 2011 and afterwards. The company has compensation coming in from the sale of subsidiary in Venezuela. The company can easily pay off substantial amount of its existing debt in 2010. The company’s current operations are also make strong cash flow. So management is putting the cash flow to work by paying off debt and expanding in existing markets. I think the company has great future ahead.