Forecast for Steel Industries - Performance Before After...

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Performance: Before & After After enjoying a sturdy growth for most of the past decade, the steel industry suffered a setback in 2008 due to the recession, as consumers utilized existing inventories rather than buying new stock. However, the industry turned around in late 2009 and continued to grow in 2010 and 2011, in tandem with the global economic recovery. The growth witnessed in 2011 was noteworthy considering the widespread headwinds facing the industry: the ongoing Eurozone sovereign debt crisis, earthquakes in Japan, the political unrest in the Middle East resulting in a surge in oil prices, and the tightening of government monetary measures in many emerging nations. Demand for steel has benefited from growth witnessed in the developing economies that helped counter the sluggishness in developed economies. Asia, particularly China, continued to be the principal driver of growth. Demand for steel products nonetheless remains below pre-recession levels. Questions about China's growth going forward also add an element of uncertainly to the outlook. The automotive and construction markets have historically been the largest consumers of steel. The automotive sector is showing significant promise. In February 2012, total motor vehicle sales reached their highest level in the past 4 years at 15.1 million SAAR (Seasonally Adjusted Annual Rate). In May, many auto manufacturers made their best Memorial Day sales in over five years. In June, total motor vehicle sales were at 14.1 million, improving from 13.8 million in May. Domestic sales rose from 10.6 million SAAR in May to 11.1 million SAAR in June, almost close to the highest level of 11.4 million attained in February. The outperformance was somewhat helped by lower gasoline prices, which made domestic trucks more attractive and increased from 5.92 million SAAR in May to 6.14 million SAAR in June, the highest number of domestic trucks sold since March 2008. For the first half of 2012, sales averaged 14.3 million SAAR. We believe these upbeat numbers bode well for the steel industry. On the contrary, the construction sector has been a drag on the steel companies' earnings. According to the American Institute of Architects, the architecture billings index, an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, was 48.4 in April 2012, dipping further to 45.8 in May and 45.9 in June. As a reminder, the March reading of 50.4 was significant, as any score above 50 indicates an increase in billings. After hovering above 50 for five consecutive months, the index dipped to negative territory from April. This points to a potential weakness in non-residential construction, with little hope
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of a near-term recovery. As per the U.S. Department of Commerce, housing starts increased 6.9% to a seasonally adjusted annual rate of 760,000 in June 2012 from the revised rate of 711,000 in May 2012 and 23.6% above June 2011. Though the June results have been the strongest since October 2008, it is approximately half the 1.5 million annual pace that economists consider normal.
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