Metals & Machinery: Iron Stomach Needed

-- As steel tariffs begin to lose their bite, steelmakers will again face falling prices

-- Soft auto sales will vex machine-tool makers, but demand for aluminum remains strong

The sluggish economy is dimming hopes in much of the heavy manufacturing sector. While steel prices are unlikely to drop anywhere near the 20-year lows of 2001, demand will weaken. As auto sales slow, so will machine-tool sales. But aluminum makers are likely to forge ahead.

Beleaguered U.S. steelmakers enjoyed a brief reprieve last year. Import-restricting tariffs and a spate of steel plant closings made for tight supplies and firm pricing. Yet prices have pulled back 4% from the past summer's high in response to softer demand from nonresidential construction. Experts don't see prices falling much further this year, since tariffs will hold imports in check. Consultant Locker Associates Inc. forecasts that shipments by U.S. steelmakers will decline 1% in 2003, after rising 2% in 2002.

More consolidation appears inevitable. Last year, New York financier Wilbur L. Ross Jr. snapped up the assets of bankrupt LTV and Acme Metals and began discussions with Bethlehem Steel, which is under bankruptcy protection. The move allowed Ross to shed retirement obligations and to access lower-cost capital. As a result, Ross's new outfit, International Steel Group, is able to make cold-rolled steel for about a third less than before the reorganization. With dozens of steelmakers still in Chapter 11, more sales are likely.

In 2003, U.S. aluminum shipments will rise by 2% to 3%, roughly matching the rise in 2002. More aluminum in cars and trucks will offset slowdowns in vehicle sales, says James Southwood, president of Commodity Metals Management. But declining auto production will crimp orders for machine tools, says HC Wainwright & Co. analyst Eli S. Lustgarten. Orders could plummet by 23%, he predicts--and a recovery is at least a year away.

By Robert Berner in Chicago

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