Steel

As credit markets capsized in the third quarter of 2008, construction projects slowed and consumer spending decreased, stalling growth in the steel industry. Nonetheless, our research indicates that the long-term strength of global steel intensity (the amount of steel needed per dollar of global GDP) will probably fuel growing demand for many years to come, to as much as two billion tons annually by 2025.

As recently as the 1990s, the maturing of markets in Europe and North America reduced the level of steel intensity as the demand curve for automobiles, refrigerators, and infrastructure leveled off (Exhibit 1). Since the turn of the decade, infrastructure and construction projects linked to urbanization—mostly in China but also in India, the Middle East, and other regions—have accounted for more than 35 percent of global steel demand and for more than half its growth. Demand for other metals, such as aluminum and copper, also exceeds GDP growth in these regions.

While their continuing development should support the industry over the long term, the immediate impact of the credit crunch will in all likelihood be reduced demand for steel—not only because end-user demand will diminish, but also because players along the supply chain will probably use up existing stocks. In addition, the crunch will inhibit short-term expansion plans for new steel-making and -mining capacity around the world, and that is likely to create a more volatile balance between demand and supply. Within a few years, however, expansion may resume as the industry works to keep up with growing demand in emerging markets.

High tech

During recessions, tech spending has historically fallen more than GDP has. Our research (covering economic downturns in 50 countries over the past 13 years) indicates that IT spending typically fell 5 to 7 times farther than GDP, with the most severe declines in hardware (which fell 8 to 9 times GDP) and less severe ones in software and services (3 to 5 times GDP).

The decline was much larger during the 2001 downturn (Exhibit 2) because spending on computing and telecommunications equipment as a percentage of GDP (IT intensity) had previously soared to historic levels. A boom in tech start-ups, along with Y2K fears, promoted a spending surge on communications equipment, servers, and a range of other products. When the economic slowdown arrived, start-ups foundered, many companies had too much tech and telecom capacity, and spending cuts across the economy were severe. Chastened by that experience, many companies have since pressured their CIOs to manage IT more effectively.

As the economy enters the current slowdown, the growth of IT intensity is closer to its historic trend—even slightly below the 10-year average. While most companies are reviewing their IT budgets in an effort to reduce overall spending, many are trying to maintain high-priority investments. The uncertainty of today’s business environment makes it perilous to predict technology spending, but it does seem likely that the sector’s experience could be more in line with historic trends than it was in 2001.

Consumer Goods

Recessions have affected spending on different categories of consumer goods in different ways. An analysis of consumer spending during the 1990–91 and 2001–02 downturns shows that US consumers changed their priorities instead of making across-the-board cuts (Exhibit 3). Daily amenities—eating out, personal-care products and services, and apparel—tended to suffer. But categories such as groceries and reading materials, which substituted for more expensive options, actually benefitted from higher spending, as did less discretionary items, like insurance and health care. Spending on education showed the biggest increase. While these historical trends are instructive, they may not tell the whole story this time around: tighter consumer credit, low personal-savings rates, and declining home values may cause individuals to cut spending faster and further across more categories. Even so, some categories will weather the storm better than others. Companies that react to the downturn with an understanding of their categories’ likely performance will have a better chance.

Chemicals

Global chemical production hasn’t declined in a sustained way since the early 1980s (Exhibit 4). The result then was an industry restructuring, with lower-cost new plants replacing older, less efficient, and smaller-scale ones that had lower margins. Subsequent downturns have compressed margins, delayed expansion plans, and given players with strong balance sheets opportunities to acquire undervalued competitors. Those downturns did not, however, lead to a significant industry restructuring. A major downturn today could be different: depressed demand may help new low-cost capacity in China and the Middle East more quickly displace production in higher-cost operations in Europe, Japan, North America, and South Korea.