Strength Of Steel
Yesterday, I discussed the issues surrounding the Fed's ongoing determination to hike interest rates despite evidence of a weakening economic environment. To wit:
“The Federal Reserve raises interest rates to slow economic growth to keep an economy from overheating which would potentially lead to a sharp rise in inflationary pressures. Since commodities are the basis of everything that is bought, consumed or other utilized; if there were indeed inflationary pressures on the rise commodity prices should be on the rise. As shown, this is clearly not the case.”
Last night, the World Steel Association released its June crude steel production report that showed volumes declining to 136 million tons. This is a drop of 2.4% from a year ago.
The decline in steel production, and subsequently the components that go into making steel like iron ore and coking coal, are further evidence that economic activity is far weaker than most analysts currently estimate. This is particularly the case in the U.S. where production of crude steel in June fell by 8.5% on an annualized basis.
Furthermore, the crude steel capacity utilization ratio for the 65 countries that the WSA tracks was 72.2% which is 3.5% lower than a year ago.
It is widely believed the Q1 slump in economic activity was simply a weather/seasonal adjustment error problem. However, there is mounting evidence from other economically sensitive sectors such as retail sales, manufacturing and commodities that there is more to the story.
Steel production is just the latest clue in the solving that puzzle, however, a look at reports (and charts) of basic material companies have been signaling the decline for quite some time. The latest comes from Caterpillar this morning as they once again report a dismal quarter and even worse forecast.
“While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant. Many of the key industries we serve remain weak, and we haven't seen sustained signs of improvement.Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven't helped confidence. Prices for commodities like coal, iron ore, and oil are not signaling an improvement in the short term.”
