Prospects for US Steel Industry

It is fair to say that the past year has been one of changing fortunes for the global steel industry in general and for the US steel industry in particular.  Although US demand for steel in the first half of the year was fairly subdued, a strong raft of anti-dumping legislation implemented in the latter part of 2015 meant domestic steelmakers enjoyed added protection.  Crude steel production in the first half of 2016 was stable year on year compared with import levels which were 28% lower.

 

The subsequent increase in domestic steel prices once again led buyers to search out value from overseas sources resulting in Q3 import levels being substantially higher, although still 2% below Q3 the previous year, and domestic production falling by 4%. This trend continued into October with production down nearly 5% year on year but early indications show that the general election result may have helped to halt this decline.

 

The surprise election of Donald Trump could have a profound effect on the way that the US trades with the rest of the world.  Trump appears to favour a more aggressive trade policy, regularly citing job losses as a result of imports from other countries, especially China.  As the US is already agile in its application of anti-dumping legislation when necessary, it seems likely that US policy going forward will be geared even further towards protecting domestic interests.

 

The recent high profile case of Ford cancelling its proposed Mexican production plant in favour of one in the US after continued criticism from Trump along with the president-elect already suggesting taxes will be imposed on imported vehicles suggest in the short term at least that US demand for steel looks set to improve and given Trump’s rhetoric, this growth is very likely to be supplied by domestic producers.

 

The long term effect of these protectionist policies is rather more uncertain but in November, the month of the election, US steel production increased by over 6% year on year, the first growth since May.  Going forward, the Australian Department of Industry is now predicting US steel production to grow by 6% this year and a further 13% in 2018 compared to the pre-election forecasts of 3% and 7% respectively.

 

It is just over a week before president-elect Donald Trump takes up his position in the White House and whilst the next five years are very likely to herald a much more protectionist stance to international trade for the US, aiding domestic steel producers in the short term, the long term consequence of this on the global steel industry and steel prices in particular is much more difficult to assess.  In the short term imports are likely to be at reduced levels, adding to the quantities of surplus steel on the international market with the commensurate downward pressure on prices.  Longer term trade restrictions are unlikely to lead to long-term prosperity with innovation and competitiveness on the global market likely to suffer.
Prospects for US Steel Industry

Iran Open for Business

Iran has been one of the fastest growing steel producing countries in the world over recent years.  Crude steel production in the country increased by 65% over the past ten years and at 16.1M tonnes, Iran has become the fourteenth largest producer globally with by far the greatest output in the Middle East.  This growth has continued so far in 2016 with production up nearly 10% in the first ten months of the year.

 

Part of the reason for this rapid development of their steel industry is likely to be the relative isolation the country has found itself over the years due to economic sanctions, along with a ready supply of iron ore which has enabled them to become relatively self-sufficient.  With sanctions lifting this year, demand for steel in the country is likely to grow considerably in the coming years.

 

This isolation and growth in the domestic industry means that Iran imports relatively low quantities of steel which reduced from 12.7 million tonnes in 2007 to just 3.1 million tonnes in 2013.  Since then, imports have risen slightly to just over 4 million tonnes each year and have remained relatively stable, although in the first nine months of this year they have grown by more than 20%.  In a story that is familiar in many parts of the world, much of this growth has been in “alloy” HRC, plate and CRC from China.

 

Shipments from China have grown by 47% to 578K tonnes so far this year with the country representing the second largest source of steel with only the UAE shipping more.  In actual fact though, a closer inspection of the shipments from UAE reveals that the bulk of this tonnage is likely originating from somewhere else with the UAE acting as an intermediary.  A significant proportion of the increase in imports from the country appears to be the “alloy” flat products that Chinese producers export in order to qualify for tax rebates so it seems reasonable to assume that much of the 29% growth seen in imports from the UAE also originate in China.

 

The vast majority of production in the country is destined for the domestic market, although Iran does seem to be starting to export more.  At its lowest level in 2012, they were exporting just 260 thousand tonnes of steel but since then this has been on the increase.  In 2015 exports hit 3.8 million tonnes and have since grown even more so far this year.  In the first nine months of 2016 alone, the country has exported 4.3 million tonnes, more than the whole of 2015 and representing a year on year growth of 41%.

 

The majority of this growth has come from increased shipments of ingots and semis with larger quantities of ingots being shipped to other Middle East nations; a growth of slabs being exported to Morocco, Brazil, Thailand and Taiwan, and a rise of other semis going to Oman, Thailand and Taiwan.

 

The Iranian steel industry is at an interesting point in its development.  Since economic sanctions were lifted at the start of this year, the country is becoming increasingly “open to business” which should offer opportunities for overseas steel producers to exploit a new and growing market. Over a five year period ending in 2020, Iran is seen to be one of the fastest growing steel sheet markets in the world.  The country’s steel sheet consumption growth is forecast to be more than double the world average over 2015-2020. Due to the relative strength and low-cost nature of Iranian steel producers, however, it seems likely that much of any growth may be taken up by domestic production and the only country so far that has managed to exploit the opportunity here to any great degree is predictably China.

 

Indeed, as Iranian steel producers become more outward looking, they may represent a threat in overseas markets although to date they have only really been active in the semi-finished steel markets but with shipments of slab to Thailand growing considerably it seems they have picked up some of the business that was being supplied by SSI in the UK.

 

Iran Open for Business

Global Steel Demand Expected to Increase in 2016

In April, global steel demand was predicted to decline by 0.8 this year but the latest figures from WSA show that global demand for steel is predicted to remain broadly flat in 2016, increasing by just 0.2% whereas next year there is slightly faster growth forecast, with an increase of 0.5% expected for 2017.   As usual there are differing fortunes forecasted in various regions around the world.  Of the ten largest steel producing countries, Brazil is forecast to undergo the worst contraction of demand this year, with a 14% crash as the commodities rout and political uncertainties took their toll.  In 2017, steel demand in Brazil is expected to recover as the country stabilises.

 

Elsewhere, Russia and the US are both expected to show declines this year but to recover in 2017 whereas Chinese demand is forecasted to contract by 1% and then another 2% in 2017 after already declining by more than 5% last year. This is very significant for the global industry as a partial recovery in global steel prices has encouraged some side-lined Chinese capacity to come back on stream with production in China only down 0.1% year to date August and production actually up year on year for the past six months.  As demand is falling, this leaves only one place for this extra production to go – external markets and export figures show that shipments from China have increased by another 10% so far this year when compared to the record figures recorded in the same period of 2015.

 

As if this wasn’t enough, OECD figures show that China currently has the second highest level of new global capacity in various stages of planning and construction.  The country with the most capacity coming on stream over the next few years, however, is actually India, which is also showing the fastest production growth so far this year out of the major steel producing nations.  In contrast to China, however, steel demand within India is also on the rise.  After increasing by 5.3% last year, it is predicted to rise by 5.4% this year and a further 5.7% in 2017.

 

Rather than being a direct threat to global steel markets, therefore, the new Indian capacity looks destined for the burgeoning domestic market with Indian exports only being about 7.6 million tonnes last year.  The threat, therefore, comes from potential displaced tonnage or the Indian economy suffering some sort of unexpected shock.  Imports in 2015 hit well over 13 million tonnes and nearly three quarters of imports came from China, Japan or South Korea, potentially causing yet more tonnage to enter the already-saturated Asian market.  Indeed, so far this year the growth in Indian production has led to a 5% reduction in imports during the first half of the year.

 

It seems clear that the biggest threat to the recovery of the global steel market is the further weakness in Chinese demand coupled with continued increases in domestic capacity in the country despite government assurances that capacity would be removed.  This is coupled with the fact that the one major global steel consumer where demand is growing substantially is adding to its own production capacity at a rapid rate, meaning India is unlikely to act as an outlet for continued excess global capacity.
Global Steel Demand Expected to Increase in 2016

Potential Threat To European Rebar Producers

Deformed Rebar is a very important product for certain European long product producers.  After Turkey and Ukraine, the other countries in the top five exporters list are the Southern European nations of Italy, Spain and Portugal.  It may come as a surprise to learn that Algeria is the most important export market for each of these countries with Italy alone shipping around 1.2 million tonnes of rebar to the country each year.  This important market accounts for about 76% of all tonnage exported from Italy and about two thirds of exports from Spain.

 

Southern European producers enjoy a fairly unique situation in Algeria as a 2005 agreement between Algeria and the EU permits free trade between the two regions and Algeria imposes an import duty on shipments from the dominant player in the market, Turkey.  Despite this, however, there are indications that this beneficial situation may not carry on indefinitely.

 

In a situation familiar in other parts of the world, Chinese rebar producers have identified an opportunity in Algeria and Chinese exports of all HR bars to the country have increased from 131 tonnes in 2013 to 345,000 tonnes in 2015 and a further increase so far in 2016.  This already seems to have had the effect of displacing Spanish and Portuguese tonnage as exports from Spain have fallen by 440,000 tonnes in the same period whilst shipments from Portugal were down 141,000 tonnes.  The Italian producers seem to be more aggressive in defending their market share, however, with more modest declines.

 

The long-term threat may not actually be coming from China, however, as in the face of falling tax revenues from the collapse in the oil price, the Algerian government is looking to diversify its industry away from the oil and gas sector.  In order to facilitate this, they are looking to invest in steel projects and are mandating that government sector end users prioritise locally produced products over imports.  In addition, the government has imposed a two million tonne limit on rebar imports this year and has revoked some import licenses.

 

On the supply side, Tosyali Algerie has a 500,000 tonne a year rebar mill which started production in 2013 and has initiated an expansion to nearly double its steelmaking capacity, although a timeline for the project has not yet been announced.  The old Arcelor Mittal plant, which passed into the government’s hands in October has a 400,000 tonne per year rebar mill and it is looking to add another long products mill with a capacity of one million tonnes by 2017.  Finally, a joint venture between the state owned steel company and Qatar Steel has been initiated which is expected to have a 750,000 tonne per year rebar mill up and running by the end of 2017.

 

So far this year Italian exports have increased by 6% and Portuguese exports grew by 21%, offset by a 34% decline in Spanish shipments but how long can European producers hang on to this vital market given the two-pronged assault from Chinese producers and the measures taking place to grow the rebar industry within Algeria itself?  Given that combined, these three countries supply well over two million tonnes a year to Algeria, the loss of this market would likely have profound consequences for the rebar industry in Europe.
Potential Threat To European Rebar Producers

Chinese Exports on the Rise Again

Despite the slow-down in Chinese demand for steel, crude steel production in the country actually increased by 1.3% year on year in quarter two to 209.4 million tonnes.  This had a predictable effect on exports as a very strong June figure of 10.4 million tonnes means that shipments from China in Q2 increased by over 10% to 29.9 million tonnes, the second highest quarterly export figure in history.

This is a situation that is not new of course, and in recent years we have seen Chinese producers looking increasingly further afield in their search for export markets.  It is therefore rather surprising to see this trend reverse strongly over the last quarter with shipments to other Asian counties, including the Middle East, increase by 25% whereas exports to non-Asian counties actually declined by 20%.

Aside from a large growth in shipments of HR Bars to Saudi Arabia and UAE, all of the other significant increases have been to other South East Asian countries with exports to Thailand up 83%, exports to Vietnam increasing by 39%, shipments to Taiwan up 37% and shipments to Indonesia more than doubling year on year.  In contrast, exports to India were down 28%, shipments to the EU fell by 30%, exports to the US collapsed by 61% and shipments to Brazil declined by 66%.

The reasons for this change are somewhat varied.  Exports to Brazil are likely to be down due to the dire state of the economy, ironically partly caused by a reduction in Chinese demand for steel and the knock-on effect for economies that are dependent on mining commodities.  It is also true that shipping rates have ticked up somewhat since the low in Q1, although this is unlikely to have been enough to deter many producers shipping outside South East Asia.  It is also true that Asian economies are expected to grow more strongly than those in other parts of the world with the ASEAN five consisting of Indonesia, Malaysia, Philippines, Thailand and Vietnam predicted by the IMF to grow GDP by 4.8% this year.

It seems as though the bulk of the change could actually be as a result of a growing concern globally of the threat of Chinese steel on global markets and the increase of protectionist measures introduced to combat the issue of Chinese dumping.  We have mentioned previously the robust anti-dumping measures implemented by the US which have had a direct effect on Chinese exports to the US market.  India has also made a concerted effort to try and shelter its domestic market from cheap imports.  In February, the government imposed a floor price on the import of 173 steel products and in March extended import taxes on some products until 2018. Last month, they imposed a provisional anti-dumping duty on seamless tubes and pipes imported from China.

In comparison the EU response has been more muted but could the ongoing objection by Eurofer to China being granted market economy status, as is being considered by the EU, have encouraged Chinese producers to be less aggressive in their targeting of EU markets?  This has coincided with the announcement that China will step up its efforts to cut some 45 million tonnes of capacity this year after only hitting a third of its target in the first half.  Whether this increased effort to cut capacity along with a reduction in the “dumping” of steel in European markets is a genuine effort to address global industry concerns or more of a temporary measure to smooth the country’s progress to be seen as a “market economy” remains to be seen.

It will be interesting to see if this trend continues for the rest of the year and whether the granting of market economy status to China, if it comes to pass, will have an effect.  In the long-term the continued increase in protectionist legislation around the world is unlikely to be positive for the global industry but in an environment where a country responsible for producing around half of the world’s steel is ramping up production for export in a market that is already heavily over-supplied this response is understandable and unlikely to reverse until Chinese over capacity is tackled decisively.

 

Chinese Exports on the Rise Again

Brexit: Impact on the UK Steel Industry

There has been much conjecture over both the short-term and long-term effects of the UK referendum vote to leave the EU but how will the result effect the steel industry in the country?  The simple answer is of course that no-one knows for sure but there are some things we can look into.

One important aspect is the effect the vote will have on markets for steel products, and in particular the key automotive and construction sectors.  The UK automotive sector has been a success story over the past few years with SMMT figures showing a 13.6% rise in production in the first five months of 2016.  The successful future of this industry will most likely hinge on whether the UK can retain its free trade deal with the EU, an outcome viewed as likely given the importance of the UK as a premium market for German manufactured vehicles.  In the short term, however, the uncertainty is thought to lead to a slow-down in growth for the industry.

The factors affecting the construction industry are rather different.  Although the market has been strong in recent months with an estimated 9% growth in steel-intensive heavy construction based on heavy section sales, the Brexit vote brings uncertainty to the industry.  The share price performance of the UK’s listed construction companies hints at the fact the market is viewing a slowdown as likely with the construction of large steel-intensive buildings reliant to some extent on the economic health of the country as a whole.  The industry may also experience cost inflation, particularly in regard to worker wage inflation if restrictions are placed on skilled EU workers entering the country.

While the outlook for the markets for steel products is mixed, the vote could potentially offer some hope to the steel industry.  The UK steel industry has undergone an unprecedented period of turmoil over the past year with issues such as aggressively priced Chinese imports and expensive energy costs given as factors. In leaving the EU, Britain should be able to self-determine more effective solutions to both of these issues should the political will be forthcoming.

If domestic markets are about to enter uncertain times then more importance may be given to UK exports.  One immediate effect of the Brexit vote was the depreciation of sterling.  In just one month, the pound has fallen by 8% against both the US dollar and the euro which is a very significant slide in forex terms.  This has the effect of making UK produced goods much more competitive in export markets and although raw material prices such as iron ore and coking coal will become relatively more expensive too, the steel scrap price will not be affected by currency movements.

Again, the success of the export market will likely depend on trade agreements struck with the US and the EU in particular but a look at the trade figures suggest an agreement should be in the best interests of many other EU nations.

The EU as a whole is the most important export market for the UK for finished steel.  In Q1 of this year 685K tonnes of steel was shipped to the region, accounting for just under 65% of the total exported.  Germany, Ireland and Belgium were the most important single markets in the EU, although it should be noted that non-EU Turkey was the largest market for UK produced steel.

Of importance, however, is the fact that this export figure was dwarfed by the import tonnage, with imports from the EU accounting for 71% of the total with the tonnage from the EU being nearly twice that of exports, at 1.2 million tonnes.  This means that the UK is a large net importer of finished steel from the EU.  In Q1, the UK imported more than 100K tonnes from each of the following member states: Germany, Spain, the Netherlands, Belgium and France.   The UK was also the second largest “non-EU” destination for German steel after Switzerland, itself a member of the European Free Trade Association.

Whilst the British vote to leave the EU will likely cause heightened uncertainty and risk and much depends on the political will and diplomatic nous of the leaders of the country, it seems clear that there are potential opportunities for an industry that has suffered its fair share of issues over the past year.

 

Brexit: Impact on the UK Steel Industry

Chinese CSP Shoots Up in March

The decline in Chinese domestic demand for steel has been well documented and there had been reports in the press of government plans to cut some of the older, more polluting capacity and to reduce annual production by around 150 million tonnes in five years.  There has been very little evidence of any progress being made in this regard, however, as although Chinese production fell by 3% year on year in the first quarter, the traditionally strong month of March actually saw production increase by 1% to 70.7 million tonnes which, incredibly, represents the second highest ever monthly production figure from the country.

This increase in production in a market that is struggling with sluggish demand had the now familiar effect on exports.  Shipments in March were a staggering 30% above those of March 2015. Although it should be noted that February and March last year suffered temporary declines due to the government’s decision to remove tax rebates from exports of steel containing boron.  Nevertheless the figure of 9.9 million tonnes is still substantial, has been bettered only four times in history and was enough to give a quarterly export figure 8% above that of Q1 last year.

So where is all of this extra Chinese steel going?  It is clear that it is not being shipped to the US as that country has moved quickly to protect its domestic industry against the threat of cheap Chinese steel products with swift anti-dumping tariffs being enacted.  This has led to a 71% collapse in Chinese exports to the USA in Q1 and we have also seen a 66% fall in shipments to Brazil as demand for steel in that country has suffered.  The largest increases in tonnage terms have been to Thailand, Vietnam and the Indian subcontinent with exports to India, Pakistan and Bangladesh all increasing considerably.

We have also seen an increase in exports to Turkey, which were up 56% year on year, and a growth in shipments to the EU, which increased by 22% with Italy suffering the brunt of the effects with tonnage that nearly doubled in the quarter.  In addition, there has been a three-fold increase in Chinese exports to Algeria, itself an important market for Italian steel producers.

This growth in Chinese production and exports has taken the industry by surprise somewhat, with many sources expecting a decline in Chinese output rather than a large tonnage of surplus Chinese production making its way onto the global market.  This, combined with the news that some 41 blast furnaces have been brought back on line in the country and the fact that there remains considerable overcapacity in the market is concerning and calls into question the sustainability of the recent global price increases seen in the industry.

Chinese CSP Shoots Up in March