According to World Steel Dynamics, a U.S. steel consulting firm, steel production could fall next year by 13.9% compared with this year. This downturn comes after a long period of growth in the steel industry. In fact, output has grown every year since 1998 – soaring from 777 million metric tons a decade ago to 1.34 billion metric tons in 2007.

The catalyst behind the expansion has been a robust world economy and a steep rise in demand in China – by far the world’s biggest steel producing and consuming nation, accounting for more than a third of global steel output.
But the sector has been among those worst hit by this year’s financial storms, with share prices in many steel companies having fallen by more than two-thirds since the middle of 2008.

“The reduction in demand we’ve seen in steel goes beyond typical cyclical downturns given the level of distress in global financial markets and tight credit conditions,” Carol Cowan, a U.S.-based analyst at Moody’s Corp.(MCO)credit rating agency, told the Financial Times.

Steel companies’ share prices have been hit hard. Severstal OAO, Russia’s biggest steelmaker, has seen its shares fall almost 90% since July, ArcelorMittal (MT) has dropped more than 70 per cent; and United States Steel Corp. (X), the United States’ biggest steel company is down 79% over the same period.
Meanwhile, China’s steel industry, the world’s largest, is sitting on a stockpile of 63 million metric tons, or about 13% of annual production.  Baosteel Group Corp. General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.

But China is making noise about a shift in trade policy meant to rekindle its steel mills and keep its economy humming.  The government is considering measures, including buying unsold inventory and raising export rebates, to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong told Bloomberg News on Dec. 12.

That represents a dangerous shift in policy that could hinder international trade, according to Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington.  The economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tension with the United States.

Treasury Secretary Henry Paulson has spent more than two years smoothing over U.S.-China trade relations.  Part of those efforts focused on the value of China’s currency, the yuan, to redress what U.S. officials saw as an unfair price advantage for Chinese products.  The yuan rose 21% versus the dollar from 2005, but its steady rise stalled in July, and has barely budged since.

Before leaving for trade talks in Beijing this month, Paulson told business representatives his biggest concern was that China would revise policy and reverse moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.

China’s five-year plan through 2010 aims to rebalance growth away from exports and increase domestic consumption, but so far it has met with dismal results. Household consumption declined to slightly more than 35% of China’s gross domestic product (GDP) last year from 45% in 1993.  By comparison, consumer spending represents almost 70% of the U.S. economy.

“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” Brad Setser, a fellow at the Council on Foreign Relations in Washington, told Bloomberg News. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40% of GDP.”

A shift in Chinese policy is bound to meet with resistance in U.S. business circles, especially among steelmakers.  Lawyers representing Nucor Corp, the second-largest U.S. steelmaker, and smaller steel pipe makers say they are considering new trade complaints against China.

Shift in China Trade Policy Could Accelerate Western Steelmakers’ Slump

While this week’s data from the manufacturing and housing sectors will be eagerly anticipated, nothing compares to Friday’s reports on unemployment and the picture of the ailing labor market.  After nine consecutive months of job contraction, few analysts hold out much hope for optimism.  In fact, some believe the jobless rate will climb to 7.5% during 2009.

Clearly the new president will have some major problems to solve, perhaps the biggest being that he’ll have to find a way to restore investor confidence.

After all that’s happened in the global economy and in the stock market in recent weeks – with the tremendous whipsaw volatility, that will be easier said than done.

Even so, watch this week as Money Morning carries several investment reports that will tell you what to expect, what to avoid, and where you may potentially profit.

Stay tuned.

Market Matters

For most investors, Halloween was a welcome treat from the haunted trickery of the markets over prior few weeks.  In fact, despite some frightful economic releases that virtually confirmed recession (as already noted), the major equity indexes received a nice reprieve this past week as investors moved beyond mass hysteria and found bargains in the carnage.  On Tuesday alone, the Dow Jones Industrial Average and Standard & Poor’s 500 Index each shot up more than 10%, and then proceeded with their remarkable (if not illogical) runs as the week continued.

Despite the positive moves, the Dow plunged by 14% in October, while the S&P 500 lost about 17%, making it among the worst performing months in over two decades.  The volatility was almost too much for investors to bear as the Dow experienced triple digits moves from open to close on all but three trading sessions.  Global markets underwent similar gyrations, with Hong Kong’s major index – the Hang Seng Index, for example, plunging 12.7% one day before soaring 14.4% the very next session.

The recent panic seemed to have subsided as some of the stimulus packages began to take effect.  The credit markets have thawed as corporations took advantage of the Fed’s decision to buy short-term commercial paper, thus, providing them much needed liquidity.  Major banks began receiving capital injections from the government as part of the bailout package and were “told” (in no uncertain terms) by their new “partner” to re-initiate lending programs.

Capital One Financial Corp. (COF) and Sun Trust Banks Inc. (STI) chose to be participate in the government’s generosity by selling preferred stock and warrants, though both were rumored to be eyeing weaker institutions as acquisition targets – a a strategy that may have differed from the Bush Administration’s goal of enhanced lending. [Editor’s Note: For an in-depth report on U.S. bank’s using government  money to mount takeover campaigns – instead of for increased lending --  please click here. The report is free of charge].

The week’s quarterly earnings releases were mixed at best though companies continued to warn about future weakness (which will hopefully lead to some positive surprises).  Exxon-Mobil Corp. (XOM) reaped another record quarter and rival Chevron Corp. (CVX) – the subject of a recent “Buy, Sell or Hold” featurue here at Money Morning just saw its profits double during the period.  Bear in mind, crude has plunged over 50% since mid-July (and suffered its worst monthly decline on record) so their future results may not be as strong.

United States Steel Corp. (X) announced favorable earnings, athough it also warned that weakness in commodities could impact its operations. The Procter & Gamble Co. (PG) experienced a better-than-expected quarter, though management reduced its sales estimates for the remainder of the year.  Motorola Inc. (MOT) announced a quarterly loss and laid off 3,000 workers to cut expenses. General Motors Corp. (GM) and Honda Motor Co. Ltd. (ADR. HMC) both reported poor quarters, as automakers struggled worldwide.

Economically Speaking

For days, weeks, months, maybe even years, analysts warned about the dreaded “R” word and, with each new report, the inevitability of such a downturn became more and more possible.

The afore-mentioned third-quarter GDP report confirmed that the economy actually contracted by 0.3% during the period, the worst results in seven years.  By definition, two straight quarters of negative growth translates into a recession, so the economy is officially halfway there (especially since the fourth quarter data is shaping up to be just as depressing).

Sluggish consumer activity highlighted the GDP report, as consumer spending plunged by 3.1% during the quarter. Such activity accounts for about 70% of the growth of the economy, so the ongoing concerns about future employment, market losses, and housing valuations (among others) have kept consumers out of the malls. And those reports now to significantly hinder the upcoming holiday season.  In fact, a recent BDO Seidman survey showed that retail-marketing execs believe their November and December sales will fall by 2.7% from the same periods last year.

On an even more pessimistic note, consumer confidence in October fell to its lowest level ever reported.

Almost lost in the negativity was the fact that new home sales actually climbed by an unexpected 2.7% in September, as bottom fishers found some bargains within the worst housing market in decades.  Still, sales remained more than 30% behind last year’s levels.

The central bankers continued their (somewhat coordinated) efforts to stem the global economic slowdown.  U.S. Federal Reserve Chairman Ben S. Bernanke and friends announced a half-percentage-point cut in the Fed Funds rate, reducing its target for that benchmark for U.S. interest rate. It was the second such move in October.

Some Fed watchers believe that policymakers could drop the rate even lower as conditions seem worse today than when that rate touched this level – in 2003.  Others feel that such moves have become more symbolic than substantive, and believe the Fed needs to halt future actions to let the lower rates work their ways through the system and begin impacting the economy over the next six to 12 months.

In other moves, central bankers in South Korea, China, and Norway each reduced their respective rates, and the European Central Bank (ECB) appears to be leaning toward a similar cut next week.

Weekly Economic Calendar

Source: Uncertainty Escalates as Tomorrow’s Presidential Election Looms