The Markets: We hold out hope for a V-shaped recovery keeping in mind that the damage done to the economy is mostly in the area of consumption, especially consumer spending. We view that as easier to restart than something that affects the structural composition of the economy or the financial system. Full stops in production, spending and activities of almost any type, are unheard of in economic scenarios. We think this differs greatly from the financial crisis of 2009 in that it affects primarily consumers, with businesses being collateral damage. In 2009, financial systems crashed and businesses and banks collapsed, and the consumer was damaged. Ultimately, consumer spending was affected and it was slow to return. That’s because the damage was deeply structural and caused uncertainty about survivability of the entire financial system. In this current crisis, although much worse on the consumer presently, we see hope for a quick turnaround because restarting consumer spending can be done more easily than rebuilding the entire financial system.
The Stocks: Minimills are very well positioned for infrastructure spending and will probably be the sector with the most plants operating in the near term. Integrated mills are focused more on auto and appliance sales – where production is shut down – and do not participate in the construction markets for the most part. In addition, many integrated mills are likely to be shut down for the next few months at least, and some may never restart due to non-competitive cost structures. Minimills should have the added advantage of being able to operate in a very low volume environment as we should face near term. Very low fixed costs make minimills much less sensitive to low volume penalties, and their selling price spreads versus scrap are usually stable because of the highly correlated price patterns of steel and scrap. We expect metal spreads to remain relatively wide and for volume to be low, which should generate large operating losses for integrated facilities and still allow profitable operations at minimills