Many are discussing and predicting how bad the coronavirus health crisis will be for the economy. Over the last few weeks, updated estimates of second quarter GDP have been released showing expectations for a drop of 20-30%, and unemployment rising to levels not seen since the Great Depression. Many are drawing comparisons to the Global Financial Crisis of 2008/2009. How severely this crisis hits the economy will depend on how long it lasts, which nobody can possibly know right now. However, we do know that certain dynamics of the economic environment surrounding this crisis are different than 2008/2009, providing some optimism.

The US economy was stronger, and more stable, before this crisis than it was in 2007. Banks are much better capitalized as demonstrated in the annual supervisory stress test conducted by the Federal Reserve. Unemployment was at a historic low, and both individuals and businesses were able to strengthen their financial position during the economic recovery over the past 10 years. Another key difference is the amount of monetary and fiscal stimulus that the government will provide. The Federal Reserve has cut its key Fed Funds rate to zero, offered $1 trillion dollars in daily repos, support for individuals and small and large businesses totaling $4 trillion as well as unlimited Quantitative Easing. Congress is working to pass a fiscal stimulus bill, totaling over $2 trillion dollars. For comparison, the bank bailout in 2008 totaled $700 billion.

While the immediate goal of these stimulus measures is to alleviate the pain of the current crisis, the massive size of the stimulus will undoubtedly reverberate for months, or years, after the crisis ends, fueling economic growth. Additionally, we see a high likelihood that an infrastructure bill will pass within the next few years as cost becomes less of a limit with low interest rates and higher unemployment. This would provide additional tailwinds to the economy on the backside of the crisis. While the economic outlook in the short-term looks bleak, it appears the economy will have a very solid foundation to expand once this crisis passes.

From the perspective of the steel market, the above policy actions will be supportive. However, the market has to go through some reckoning in order to get there. Over the next few months, there will be demand destruction. Automotive and energy orders at mills are already being canceled, and the future market prices are forecasting an oversupplied market. We have already seen announcements and rumors about capacity coming off from ArcelorMittal and US Steel. Depending on the length of factory closures, we may need to see more reductions for the market to reach a balance. If we do see the expected resurgence of demand towards the end of the year, capacity will need to be brought back on. Over the last year, several analysts predicted catastrophic price declines in the steel market as companies follow through with plans created after Section 232 to add additional production capacity. Much of this is scheduled to begin over the next year. The coronavirus crisis may cause the market to face this sooner than expected, and the production that is removed over the next several months may instead be replaced by new facilities once this crisis subsides.

In terms of spot market pricing, not much has changed over the last week. However, there has been a flurry of activity in the future market. The curve continued to fall last week, reaching the lowest levels since last October. Despite this excessive selling from others in the market, we had several customers realize the opportunity of the depressed curve and lock in future material and prices. Here at FGM, we are doing the same because we do not expect the curve to remain this low for long.