Guarded optimism surrounds expectations for a 2012 recovery in the U.S. steel industry, as much will depend on how firm the recoveries are in the construction and automotive sectors of the economy.

We are cautiously optimistic, challenged by the time-frame, Thomas Danjczek, president of the Steel Manufactures Association, said following his panel discussion From the Steelmaker's Perspective at the 2010 International Zinc Association's annual conference.

Are we out of it in 2012? From a steel perspective, I would put an awful lot of it on automotive and construction, Danjczek said. If automotive continues to grind back, and if construction does come back in 2012, yes. If it's slower than that, then we will be slower.

In the aftermath of the global economic downturn, U.S. steel production took a significant hit, with output slowing to just 25 million tonnes in the first half of 2009, as consumer demand for cars and new homes nearly disappeared.

Domestic steel production has since improved, with the industry now operating at about 70 percent utilization, or about 37 million tonnes in the quarter, Danjczek said.

From 1986 through 2008, annual U.S. steel production was around 100 million tonnes.

There's some reason for optimism, but we are still a long way away, he said. There are places that are positive. Pipe, plate and flat-rolled are doing very well, but construction is not. It's a mixed bag.

Economic data issued this week reflected that uncertain sentiment.

On Monday, the U.S. Commerce Department said construction spending fell for a third straight month to its lowest level since June 2003 in January, while data released on Tuesday showed U.S. auto sales stalled during February.

Commercial construction is likely to remain a weak spot for the U.S. economy in 2010.

Danjczek said the export market would not be a firm solution for the depressed state of the domestic market.

Steel is quite heavy and does not ship well. To export maybe 10 or 12 million tonnes of steel a year in a world of 70 million tonnes doesn't set the course of action. Yes, it's helpful, but our exports are still about half of what our imports are, so exports by themselves are not going to be the solution.

SERVICE CENTER ORDERS UP

Service center demand had fallen in the aftermath of the recession in sympathy with overall steel demand. Shipments by service centers -- the middlemen between steel producers and end users like manufacturers -- are down 30 percent versus year-ago levels.

As of October 2009, U.S. and Canadian service center inventories stood at 5-year lows, as a lack of consumer confidence and low end-use demand prevented inventory restocking. The record-low inventory levels are prompting many customers to fill their orders now in expectation of the demand recovery, Danjczek said.

Service center inventories are at a record low. The inventories are so low that orders are coming in now because of those depleted inventories, he said.

According to the Metals Service Center Institute (MSCI), U.S. steel shipments grew nearly 15 percent to 2.577 million tonnes in January from December.

THE SCRAP CHALLENGE

The availability of steel scrap in the U.S. will be the industry's greatest challenge going forward, Danjczek said.

The problem is that we deal in an open market. There are places in the world that have export restrictions on scrap that distort the market price ... China being one, he said.

Through December 2009, scrap prices have risen roughly $100 per tonne year-over-year.

In the world of shredded scrap, which is a key commodity, we export roughly 9 million tonnes of about a 15 million-tonne market. Sooner or later, that will come home and significantly affect our industry.

(Reporting by Chris Kelly; Editing by Phil Berlowitz)

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