Brazilian Exports Grow

As one of the supposed high-growth “BRIC” nations Brazil has great potential with an economy supported by plentiful natural resources. As the second largest exporter of iron ore in the world, however, Brazil has more recently been struggling with the collapsing price of the raw material. Given stuttering global crude steel production driven by falling demand for steel, it is interesting to note that Brazilian iron ore exports actually increased by 6% in the first eight months of the year when compared to the same period of 2014 with the bulk of the growth accounted for by a more than trebling of tonnage being shipped to Malaysia. This growth can be explained when it is considered that Brazil has some of the largest and highest grade iron ore mines in the world and Vale, for example, can therefore still profitably produce iron ore even at these low price levels.

Steel demand within Brazil remains subdued. Crude steel production in the first eight months of the year remained flat and imports fell by more than 7%, with around half of all steel exports to Brazil coming from China. Much like China, however, subdued internal demand has encouraged steel producers in the country to look to overseas markets for sales. There are also other factors that are encouraging Brazilian exports, not least the astonishing 40% depreciation of the Real against the US dollar since the start of the year and the local, cheap supply of high-grade iron ore.

All of these factors have meant that Brazilian steel exports have increased by 52% this year to 8.4m tonnes in the first eight months. Much of this increase has come from the export of semi-finished steel products, with shipments up 45% with an incredible 418k tonne increase in slab shipments to the EU and the delivery of 442k tonnes of slabs to Turkey compared to zero last year. It is clear that EAF steelmakers in Turkey and the EU have been shipping in slab from countries such as Brazil instead of making the steel themselves.

The other product that has seen major increases in exports has been hot rolled coil with shipments increasing by a factor of three. So far this year, from virtually zero tonnage last year, 414k tonnes has been exported to the EU, 155k tonnes to Turkey and 112k tonnes to Argentina. There has also been an additional 261k tonnes of HRC shipped to the US.

With ongoing political and economic problems, Brazil’s GDP is expected by the IMF to contract by a worrying 3% this year and a further 1% in 2016 weighed down by a big fiscal deficit, growing inflation, political instability and increased unemployment. This contraction is likely to lead to further currency depreciation so despite a forecast from Australia’s department of industry that Brazilian steel consumption will grow in 2016, it is likely that exports from the country will see further growth. When combined with the large tonnages of low-cost steel coming out of China, Russia and Iran, the tonnage from Brazil will contribute to increasing pressure for steelmakers in other nations.

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Brazilian Exports Grow

EAF Vs BOS – September 2015

In recent months EAF producers have struggled against the falling cost of BOS produced steel.

The decline in iron ore prices has been severe and well documented. Since the start of 2014, the price of the raw material has collapsed by 53% as of the end of May. The price of steel scrap has also been declining but at a much slower rate than iron ore, with the scrap price down around 23% during the same period. This seems to be having a detrimental effect on EAF steelmakers who find themselves at a disadvantage to the low cost BOS steelmakers based in countries such as China and Russia. We will have a closer look at two countries whose steel industry is dominated by EAF steelmakers, Turkey and Italy.

In the first five months of the year, crude steel production in Turkey, whose EAF industry accounts for about 70% of total steelmaking, fell by 6%. This is not entirely a reflection of falling demand, however, as imports during the same period increased by 29%. Imports of finished steel products were up 22%, driven by a three-fold increase in imports from China and a 32% growth in imports from Russia. The two countries are now by far the largest suppliers to Turkey with a combined annualised tonnage of over 3 million tonnes. It is also interesting to note that Brazil, from a minimal tonnage last year, has supplied over 100K tonnes in the first five months of the year. It is no coincidence that China, Russia and Brazil are all large BOS producers (68%, 93%, and 77% respectively) whose costs are driven by iron ore prices.

As well as the large increase in finished steel imports, we have also seen a 43% growth in the import of semi-finished steel products, with imports of semis from Russia more than doubling to over 1 million tonnes in the first five months of the year and imports from Brazil and China coming from no-where to record tonnages of 184K tonnes and 111K tonnes respectively. It seems, then, that as well as seeing higher imports of finished steel, Turkish steelmakers have been substituting their own steelmaking with semi-finished products from lower cost producers. This conclusion seems to be backed up by the 12% fall in imports of steel scrap.

The situation in Italy, whose EAF industry makes up around 73% of total production and is the EU’s largest consumer of scrap, is similar to that of Turkey. In the first five months of the year, crude steel production in the country has fallen by an incredible 10% when compared to 2014 with imports of scrap down 11%, whereas imports of finished steel are up 18% and imports of semi-finished steel increased by 20%. Once again, this growth in imports was driven by China which more than doubled supply to the country in the first five months of the year and represents an astonishing annualised tonnage of 2 million tonnes. The other large increase seen during the period was from Iran with a four-fold growth in imports to nearly 300K tonnes.

As with Turkey we have also seen an increase in the import of semis with the 20% increase being driven by imports from Russia. As the fundamentals for EAF steelmaking become less competitive, we should see the price of scrap come down further as demand falls. Although since May the scrap price has reduced by a further 12% reduction, this has been more than matched by a 15% further decline in the price of iron ore, however. It looks as though EAF steelmakers are likely to find trading difficult for the foreseeable future.

EAF Vs BOS – September 2015

Chinese Exports Bounce Back – August 2015

We have reported before on how falling demand for steel in China coupled with a relatively modest decline in production has led to a boom in exports from the country. Last time we suggested that measures put in place by the Chinese government to curb the addition of boron to steel in order to qualify for tax rebates was likely to have only a temporary effect on export levels.

Immediately following the removal of the tax rebate on steel containing boron, monthly exports fell from 9.8 million tonnes to 7.4 million tonnes but as expected, resourceful Chinese steel makers adapted to the changes by finding other alloying elements to add to their steel in order to qualify for the rebate and export levels recovered to 8.4 million tonnes in June. Although this is some way below the peak months at the end of last year, exports in the first half of this year were 29% higher than in the first half of last year at 49.8 million tonnes, a figure in excess of a whole year’s production in Germany.

Interestingly China’s largest export market, South Korea, did not see an increase in the first half of the year with the country’s producers instead directing their steel towards the second largest market, Vietnam, who saw imports from China increase by 69% to 4.4 million tonnes. Within Asia we also see huge increases to SE Asia with exports to the Philippines, Malaysia and Indonesia showing strong growth. In addition, there were large increases to the Indian Subcontinent with exports to India, Pakistan and Bangladesh all growing by more than 50% with exports to the latter country increasing more than eight-fold year on year.

Outside Asia the US seems to have had some success in stemming the tide of Chinese imports as exports to the States fell by 4% and although we have seen some large increases in many countries in the MENA region, it is Turkey that has seen the largest increase outside of Asia as the country’s majority EAF based steelmakers struggle to compete with the very low cost BOS based Chinese production. The EU also continued to see increasing levels of Chinese imports as exports to the region increased by 31% year on year. Traditionally it has been the UK that has been most susceptible but so far this year, it is Italy that has suffered the largest increase with Chinese exports to the country increasing by an incredible 88% to over one million tonnes. Once again, it is notable that Italy is a country with a high proportion of EAF steelmakers who are finding it difficult to compete with the ultra-low prices of Chinese BOS producers.

The increase in Chinese exports is having a tangible effect on the domestic steel markets within these countries. Turkish crude steel production is down 6% year on year and crude steel production in Italy has collapsed by 11% when compared to the first half of last year. It is unsurprising, therefore that following the lead from the US, the European Commission opened an investigation into alleged dumping of cold-rolled flat steel by China and Russia in May and has imposed a series of tariffs to counter surging imports of various grades of steel, including stainless.

Chinese Exports Bounce Back – August 2015

Uncertain Outlook for Turkish Steelmakers – July 2015

For some time Turkey has been considered a major player in the global steel industry. Benefiting from a unique position, bridging East and West, the country has also undergone decent economic expansion in recent years with annual GDP growth regularly over 6%.

In recent months, however, a number of factors have combined to put some strain on the steel industry within the country. In Q1 2015, annual GDP growth slowed to 2.3% and in 2014 internal steel consumption fell by 1.9%, the first decline since the economic downturn in 2009. Other external factors affecting the industry include the rapid decline in the iron ore price and the dramatic rise in Chinese exports. China is by far the largest iron ore consumer in the world and BOS steelmaking accounts for 94% of the country’s total output. This contrasts strongly with Turkey, which is the world’s largest steel scrap importer where EAF steelmaking accounts for 70% of all crude steel produced in the country. Although the price of steel scrap has reduced in recent years, it has not undergone the rapid decline that iron ore has seen and this has meant that Turkey has struggled to cope with the increasingly prevalent steel exports from China which have been eating away at their export markets.

These effects can be seen through the analysis of the figures. So far, in the first four months of this year, Turkish crude steel production has fallen by nearly 7% when compared to the same period of 2014 and exports are down 6%, driven by declines in shipments of semi-finished products, heavy and light sections. At the same time, scrap imports have fallen by 13% and there is evidence that Turkish finished steel producers are finding it more cost effective to import blooms and billets than to manufacture them internally. Imports have more than doubled year on year driven by larger volumes sourced from Russia, Brazil and China. Import prices from Russia, the cheapest source, just £282 per tonne compared to the average price of scrap of £200 per tonne.

The year ahead looks uncertain for Turkish steel makers, whilst the fall in demand for steel scrap within the country is likely to lead to a natural decline in the price of the raw material, thereby making EAF steelmaking in the country more competitive, it seems unlikely that cheap steel exports from China and Russia are going to cease in the near future. With a slowdown in GDP growth and further uncertainty following recent election piling on the pressure this could be a difficult year.

Uncertain Outlook for Turkish Steelmakers – July 2015

Chinese Iron Ore Imports Increase – June 2015

As the producer of half the world’s steel, China has a major impact on the demand and to a lesser extent the price of iron ore. After growing by less than 1% last year, the slow-down in crude steel production in the country has turned into a decline with production in the first four months of this year being more than 1% below that of the same period of 2014. Chinese exports during the same period are 33% higher than in the same period in 2014 in response to lower domestic demand.

Internal Chinese demand is forecast to fall further in 2015 with World Steel Dynamics suggest a reduction of 6%, which equates to 45 million tonnes and will prompt a decision by Chinese steel makers of whether to increase exports even further or reduce output. Given the current high level of Chinese exports and the growing number of trade barriers being erected it is likely that production will be cut.

At a time of increasing iron ore production as new mining investments come on stream, a decline in the demand for iron ore from China could exert significant further downward pressure on the already depressed iron ore price which fell by 50% during 2014 and by a further 17% in Q1 this year.

The downward pressure on the iron ore price as a result of lower Chinese crude steel production could be reduced, however, if the Chinese opt to curtail production of high cost/low quality domestic ore and switch to imports. There are already signs that this trend has begun as despite the small 1% decline in crude steel production during 2014, Chinese iron ore imports increased by 14% to just over 933 million tonnes. Likewise, in the first four months of this year, iron ore imports grew by 1% year on year despite the decline in crude steel production.

The sourcing strategy of Chinese steelmakers is likely to be a significant component of iron ore pricing. ISSB has is establishing a monitor, a preliminary copy of which is attached, which plots quarterly trends in Chinese crude steel production and Chinese imports of iron ore.

Chinese Iron Ore Imports Increase – June 2015

Indian Steel Imports Grow – May 2015

Following the well documented decline in Chinese steel demand growth, there have been concerns over whether Chinese steel makers can find new markets for their products and the potential consequences of a huge amount of excess steel making its way on to the global market. Fortunately we have seen recovering demand in the US and EU partially mitigate the declines seen in China and provide markets for Chinese steel but the increasing likelihood of anti-dumping measures and other initiatives to protect the domestic steel industries in these regions could restrict the amount of steel that finds its way into these markets. There could be another country that has the potential to absorb some of this surplus steel, however.

After Mohdi’s BJP party came to power last year, the Indian economy has seen substantial growth with a GDP increase of 7.5% in Q4 last year. This growth can also be seen in the country’s crude steel production. In 2014 production increased by 6.4%, a trend that has continued into this year with Q1 2015 production up some 9% year on year. The increase in demand for steel in India did not solely come from the increase in internal production. Imports rose by 28% during the year to 9.5 million tonnes. The largest contributors to this increase were hot rolled wide strip, up 28%; Wire rod, up more than 150%; and CR flat products, up 25%. Importantly the vast bulk of these increased imports came from China, with India accounting for nearly 1.9 million tonnes of extra Chinese tonnage last year with imports from the country more than doubling.

This trend has continued into this year with imports in January 2015 nearly doubling to 1.1 million tonnes with imports from China increasing by 145% to 362K tonnes. With the Indian economy showing no signs of slowing down so far this year, if imports from China continue at the current rate, India could account for another million tonnes of steel from the country by the end of 2015, thereby helping to take some pressure off the global steel industry and possibly provide an outlet for some Chinese steel makers.

Indian Steel Imports Grow – May 2015

Ukraine Steel Industry Suffering – April 2015

The past year has seen political unrest in Ukraine with much of the activity taking place in the East of the country. This has had an adverse effect on the Ukrainian steel industry with a large proportion of production centred around the Eastern Donetsk and Luhansk regions. In 2014, steel demand in the country collapsed by nearly 24% and the domestic steel industry, responsible for about 15% of the national GDP, has struggled to find new markets outside the nation in an environment already affected by oversupply of Chinese product as evidenced by the fact that total Ukrainian steel exports fell by 13% year on year. One major problem for Ukraine is that their largest market in 2013 was Russia and in 2014 exports to the country declined by 34% with exports for rebar, heavy sections and plates being particularly badly affected. Rebar exporters have been able to replace the 377,000 lost tonnage to Russia with a 360,000 tonne increase in exports to Egypt but the reductions in the other two products have not been replaced.

In contrast, despite sanctions and deteriorating relations with the West, the modest 1% fall in steel demand in Russia has been offset by a 5% growth in exports, driven by an increase in semi-finished steel exported to Turkey, Mexico and Egypt, along with a large increase in hot rolled coil being sent to Turkey and, as reported last time, surprisingly the USA where the depreciating Russian ruble against the strong Dollar has no doubt enabled Russian suppliers to offer products at very low prices.

Political tensions show no signs of abating over the coming year, and in 2015 Ukrainian steel demand is expected to decline by another 21%. With the vast majority of Ukrainian demand being met by domestic production, along with Egypt hinting that it may introduce measures to protect its steel industry from cheap imports, this must be a real concern for steel makers operating inside Ukraine. Despite the outlook being better than in its neighbouring country, Russia is continuing to experience its own problems with the collapse in the price of oil dramatically reducing prosperity and increasing isolation on the global stage meaning that the market for steel in the country is predicted to fall by nearly 7% this year, but Russian exporters do seem more adept at finding new markets for their steel.

With the continued slow-down in Chinese growth giving rise to ever more low-cost exports coming out of that country and a 3.8 million tonne decline in demand in Russia and Ukraine likely to lead to low cost product flooding the market, we could see a rise in anti-dumping measures from many countries in the coming year.

Ukraine Steel Industry Suffering – April 2015