Global steel production increase foretells
worldwide expansion

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

Steel, and the myriad products dependent on that global metal for construction, fabrication and maintenance, in all forms of endeavor, has been a perennial weather vane of the world’s industrial development direction.

Along with copper, which signals the direction of residential and light commercial construction, the overabundance, shortage or prices of these metals almost always foretell what to expect from industrial and ancillary product growth in the months ahead. If these indicators are valid, as I believe they are, the global economy as a whole is on the cusp of an accelerated growth in the second half of 2011.

However, it is now China, rather than the U.S., which has become the main center of world steel production. Whereas the U.S. produced 150 tons of steel in 1950, it is hard to come up with even one-third of that amount today. China, on the other hand, has assumed the role of steel production dominator by having become the undisputed global leader of steel production, with India and Russia following in second and third places.

In fact, Arcelor Mittal, the international conglomerate formed in 2006 between Arcelor and Mittal is the world’s leading corporate owner of steel production companies. The company’s CEO is India’s Lakshmi Mittal, but the company is headquartered in the European nation of Luxembourg.

U.S. Steel, at one time synonymous with America’s corporate, as well as steel, dominance in production and distribution, with its present stock price underwater, is poised for a rebound, both in production, revenues and equity value potential.

Although modern, highly accelerating global technology has reduced global steel to a more humdrum commodity, that mighty metal and its supporting iron ore mining facilities are an indicator of a nation’s industrial strength. That is why such huge iron ore mining enterprises as Australia’s Rio Tinto are in today’s economic spotlight, catapulting that underpopulated southern hemisphere continent and its government capital, Canberra, into a bidding target for its natural resource firms by Chinese and other prospective world buyers.

Barring further unforeseen circumstances, such as natural calamities or further Mideast/North African geopolitical developments, experts expect global industrial activity to surprise on the upside later this year.

Housing sector stuck in deep depression

The old adage known as Murphy’s Law, "What can go wrong will go wrong," certainly applies to America’s disastrous housing market.

Of all the dismal statistics that jump out at me, one that caught my eye was that the 323,000 homes sold in 2010 comprised only 60% of sales posted in 1963, almost 50 years ago, when records were first kept. No year since has been lower. What’s even more distressing is that almost 40% of current sales were forced foreclosures. This mix brought prices down to levels not seen since the early 1990s. If the current rate prevails through 2011, the average price per house sold will constitute the sixth year in a row of new home sales decline.

Because residential construction had been the backbone of the U.S. economy’s viability since the post-World War II period, overall gross domestic product growth is destined to be tepid for months, if not years, to come. Its ancillary effects have been felt by thousands of developers, many of them on the verge of bankruptcy.

The long-term outlook is looking equally bleak. Whereas housing had long been considered the prime asset for most Americans, it has now taken on the stigma of a liability. The large proportion of foreclosures bespeaks of housing abandonment, creating an unprecedented massive shift toward rental. The record low mortgage rates and attendant interest rate reduction no longer act as a stimulant. This has also positively impinged on America’s positive savings rate and the lessening of consumer loan demand on U.S. banks.

With a 313 million population mass, expected to reach 450 million by the end of the 21st century, rentals, whether metropolitan high rises or free standing, are becoming the housing of choice. Shortages in this subsector are rapidly increasing, shifting raw materials such as copper, contractors and labor for this flourishing subsector area of potential construction, into the rental arena.

In the meantime, the red hot manufacturing sector seems to have taken a breather in May, but it is still on the way to a banner year, spurred by an unexpected surge in export shipments of construction machinery, automotive components, armaments and a record total of agricultural products, including controversial shipments of U.S. subsidized ethanol.

Big government, big business confound independent enterprises

Despite all the recent media hype regarding an improving employment scenario, plus improvement in home sales and residential new construction bouncing off the floor, the "wealth redistribution mentality" emanating from the current administration will continue to follow its ineradicable government ownership and control objectives, tempered only by the need to achieve re-election on November 6, 2012.

The bitter irony is that the American nation’s mega-sized businesses are more in sync with the Washington, D.C. beltway than the tens of thousands of privately owned companies that potentially employ 2/3 of the U.S. jobs pool.

This conclusion, which I derived at through ongoing observations as well as through several hundred interviews with independent manufacturers, distributors and retailers were confirmed by 3M CEO George Buckley and several top corporate executives of my acquaintance who preferred to remain anonymous.

Big business leader Buckley courageously described the Obama administration’s policies as “the most anti-business" of any president in "long-term memory." He also alluded to the fact that multi-national companies have added more than twice as many jobs in their overseas subsidiaries and divisions than those brought into the workforce in the U.S. in recent months. The additional business derived from this foreign employment expansion is way out of kilter with the additional business generated overseas. It’s strictly a matter of cheap labor costs.

3M’s CEO reiterated that publicly-held corporations are responsible to their stockholders, first and foremost, and are constantly sensitive to their published quarter-annual earnings, which tend to be reflected in the value that investors place on their market price.

He added that the advent of Obamacare has "all the makings of a major business catastrophe" and that the additional strangulation of the Dodds/Frank financial regulations would tend to drive even more jobs away from America’s shores.

With the reaching of the debt ceiling, growing deficits, an out-of-control debt and a possible credit downgrade of the U.S. treasury bond holdings converging into a potential fiscal catastrophe, a new panel has been reestablished by the president to forge a solution. Good Luck! It’s questionable whether panels can replace decisive leadership.

Current consumer savings rate is healthy phenomenon

As latest consumer income and expenditure statistics indicate a long-term commitment to an ongoing 5 to 6% savings rate of annual take-home revenues, it’s becoming increasingly apparent that the American wage earner has reached a reasonable balance between savings and purchasing power.

This solid shift to such a conservative stance has not been seen for the past 20 years and is obviously occasioned by concern over future government entitlements and the expected decreasing dependence on Social Security, Medicare and lower taxes. Despite an upward-creeping economic improvement, the bulk of American families expect tougher times ahead, a reversal of the long term optimism endemic to America’s successive generations since the end of World War II.

Despite a stubborn residue of high unemployment, America’s working majority is still spending reasonably well, but not relying on credit cards, short-term bank loans or stretched-out payment plans. In fact, debt repayment has been on a fast track, another reason why both solid savings rates and consumer activity have exceeded previous expectations.

With an expected gross domestic product of approximately $14.5 trillion for 2011, the consumer sector will still approach two-thirds of total gross domestic product this year.

As the trade deficit is shrinking somewhat, despite the soaring prices of energy imports, greater domestic manufacturing activity and a surprising bulge in export revenues, the per capita income level should be on the uptick as the year wears on.

As previously indicated in these columns, this shift back to domestic manufacturing and booming exports is affected by a plunging dollar, renewed faith in the quality of "made in America" and the accelerated growth of technology, as well as the expansion of private enterprises, despite the continued attrition of hobbling federal regulations.

But the overall commitment to individual savings appears to be primarily motivated by a deep mistrust that the U.S. Government’s long-term support in health and retirement assistance won’t be there in future years when it’s needed.

To stay up to date with my daily blogging, be sure to log on to my hyperlink at www.theworldreport.org and then click on “Morrie’s page,” announced in the middle of the World Report website. Your recommendation for my blog, as well as the individual columns will be much appreciated.