Indian Steel Exports to EU Grow

Much has been made of the meteoric rise of Chinese steelmaking over the past decade but as we have discussed before this peaked in 2014. There is another major Asian steel producer, believed to be the lowest cost major producer in the region, that has more than doubled crude steel production since 2005 and is continuing to grow, posting a record 95.6 million tonnes last year, a growth of 7% compared to the global growth rate which was just 1%.  After the record tonnage posted last year, in the first five months of 2017, Indian crude steel production grew by another 7%.  At this point in 2018, if the rate of growth stays the same, India will have overtaken Japan to become the second largest producer of steel in the world.

This growth in steel production has coincided with a decline in imports. At just under 10 million tonnes, imports are relatively modest for a country of this size and last year they collapsed by 25%.  This decline has continued into the first quarter of 2017 with Q1 imports declining by another 43% year on year with falls seen across most products.  There have been declines in supplies across most origin countries but Brazil and China seem to have been hardest hit.  Whilst China is still, just about, the largest supplier of steel to India, imports have decreased by 64% so far this year as anti-dumping legislation has taken effect.

Conversely there has been a huge increase in exports. Last year there was a 37% growth in exports and at 10.3 million tonnes, the country became a net steel exporter for the first time. So far this year, export growth has accelerated considerably and Q1 saw a 157% hike in exports to more than 5 million tonnes which, if maintained for the rest of the year, would make the country the 6th largest exporter in the world.  The growth has mostly come from HRC, CRC and semis with the EU accounting for the bulk of this increase.  Indeed, in Q1 alone, India increased exports to the EU by more than 1.2 million tonnes with Italy, Spain and Belgium seeing most of this growth.

According to the union minister of steel, the country is targeting a trebling of last year’s production total by the end of 2031 with the focus being on higher-value finished products. Although projections for internal steel demand are also high, it seems clear that a proportion of this growth will make its way into exports.

We have a situation where India is likely to become the second largest producer of steel in the world next year, where imports are dropping, being discouraged by robust anti-dumping legislation, and exports are set to more than double, with EU markets being the main targets. Having been a net steel consumer in the past, India is now becoming a major supplier to the global market, at least in specific product areas and to certain markets.

Indian Steel Exports to EU Grow

Iranian Steel Industry Strengthens

At just under 18 million tonnes last year, Iran accounted for more than half of all the steel produced in the Middle East and is becoming an important player on the world stage. It is also growing rapidly with production up 90% over the past ten years.  This growth has continued into this year with crude steel production in Q1 increasing by 13% year on year, more than double the global rate of growth.

Iran, as with many rapidly developing steel producing nations, has traditionally imported more than it exported but, partly due to its chequered relationship with the international community, the country is also more self-sufficient than many nations as it is unable to rely on being able to access Western products under sanctions. Imports of around 4.5 million tonnes per year are dwarfed by the domestic production of 18 million tonnes.  Unlike imports, which have remained fairly stable at this level over the past few years, the country has started to export more tonnage as it finds itself less encumbered by international sanctions.

In 2016, for the first time, Iran exported more than it imported with exports of 5.7 million tonnes representing a 49% increase over the prior year. This is a trend that has continued into 2017 with Q1 exports showing a further 20% growth when compared to Q1 2016.  The vast majority of these exports, some 79% of the total so far this year, have been ingots and semis but the country has also exported significant tonnage of rebar and heavy sections.

As would be expected, Iran has traditionally exported these semi-finished products to other countries in the Middle East and North Africa but so far in 2017 it is notable that Iranian producers are becoming bolder in their search for external markets and the main growth areas have been Thailand, Taiwan and Indonesia. The same cannot be said for the growth in exports of rebar and heavy sections with the increase in shipments instead heading to Afghanistan and Iraq, no doubt filling demand resulting in efforts to rebuild in those nations following years of turmoil.

Conversely in Q1 this year, after a few years of stable tonnages, imports nearly halved despite a rise in demand. Traditionally the country is an important market for Russian, Chinese, Indian and Korean flat products but evidence suggests more or both HR and CR products have been sourced internally.

With enviable reserves of natural resources, being favourably situated between Europe and Asia, and having a growing internal steel industry, Iran has the potential to be a significant force on the global market. Incumbent president Hassan Rouhani’s recent re-election suggests there is a desire within Iran to integrate further into the international community, thereby increasing the risk of potential disruption to the international steel market from Iranian steel; but the current US president’s recent comments during his visit to Saudi Arabia suggests that the USA may potentially not be a viable market for Iranian goods should he enact embargos against the country, meaning they would likely have to look east to Asia or west to Europe for markets for their growing exports.

Iranian Steel Industry Strengthens

Spanish and Italian Steel

Global crude steel production in 2016 exceeded expectations with a forecast reduction of 2% being transformed into a growth of almost 1%. Growth rates varied across the main steel producing regions of the world with India at the forefront with a growth of 7.4%.  Ukraine and Turkey followed closely both reporting growth rates of over 5%, followed by China at 1.2%.  In contrast the USA and Russia experienced a marginal decline with South America and Brazil falling by a more substantial 7.4%.  EU crude steel production saw a 2.5% decline.

Looking closer at the EU performance the fall was accompanied by a 12% decline in EU exports and a 10% increase in imports suggesting a relatively healthy domestic demand level. In addition, the overall decline was not distributed equally across the main steel producing member states with the UK registering the most significant decline with a fall of 30% followed by Spain and to a lesser extent France, reporting reductions of 8.2% and 3.8% respectively.  In contrast, Italy, the second largest EU producer generated an impressive 6% growth year on year.

The causes of the decline in the UK have been well documented with the demise of SSI and the restructuring of the Tata owned facilities but the reasons for the differing fortunes in Spain and Italy are less apparent.

Spanish exports declined by 2% during the year compared to imports which grew by 6%, driven by greater activity from Brazil, Iran, India and Turkey. An important driver of the underperformance in Spain was the decision by ArcelorMittal to idle its Setsao HRC plant in January.  With a 1.5 million tonne capacity, the plant was re-opened again in September so this single event is likely to account for the shortfall seen in production in the country as underlying demand remained stable.

The situation was reversed in Italy with a 2% reduction in imports, demonstrating that domestic producers grew share compared with Spanish producers who lost share. The largest fall was the 423 thousand tonne reduction in Chinese shipments into Italy, easing some pressure on local producers.  Italian producers have also fared well in export markets as despite a 9% fall in shipments to their second largest market Algeria, overall exports grew by 9%.   This growth has come from closer to home with shipments to other EU countries increasing by 14%, particularly to Germany and France.

So far this year, EU crude steel production has continued to underperform. In the first two months of the year growth was just 1.6% compared to overall global growth of 5.8%.  The UK has been one of the better performers so far, however, against softer comparisons last year but Spain continues to struggle with a 6.6% decline.  Italy has also found growth hard to come by in contrast to 2016 with an increase of less than 1%.

Going forward it is clear that the EU faces some uncertainty with Brexit now officially underway and questions over whether the local producers can regain market share from overseas suppliers. The recent imposition of anti-dumping duties on Chinese HRC is an important step, although arguably a year too late.  In Spain, a growing GDP suggests demand should be fairly robust this year but the question is whether this will be continued to be taken by imports.  In Italy, much depends on the future of Ilva’s Taranto plant, the largest steel plant in Europe.  A number of different consortia have bid for the plant and as last year it ran at just 53% of its 11 million tonne capacity, the eventual winners plans will have a profound effect on Italian steel production going forward.

Spanish and Italian Steel

Chinese Steel Demand Improves

With around half of the world’s production, China is by far the most influential country in the global steel industry. In recent years, a slow-down in demand in the country has led to an explosion in exports as Chinese producers sought new markets rather than cut production which subsequently had a profound effect on world prices.  In the past few months, however, there is evidence that this trend has reversed.

At the start of 2016, in response to the lower domestic demand, Chinese production was predicted to decline in the year as a whole. In the first two months of the year, this trend was apparent with a fall of nearly 6% year on year.  In March, however, this trend reversed and Chinese production started showing a year on year rise each month which accelerated from August through to November.  The upshot of this is that by the end of the year, Chinese production actually posted a 1% rise in the year as a whole.

In the past, the consequence of this rise in production would have been a subsequent growth in exports but this has not been evident in 2016. In the first half of the year, Chinese exports of total steel did indeed continue on their growth trajectory with a rise of more than 9%.  In the second half of the year, however, just when production growth started to accelerate, Chinese exports actually declined with Q3 showing a 9% reversal and Q4 posting an astonishing decline of nearly 20% year on year with the lowest quarterly total since Q2 2014.

This phenomenon has helped propel global prices for nearly all steel products and raw materials to highs not seen since 2014 and would suggest a big hike in Chinese demand for steel but is this the full story? It seems as though this has not led to a build in stock as Chinese steel inventories as a proportion of production were at a historic low of 8.2 percent in November. It appears that this increase in apparent demand reflected in consumption, prompted by an unexpected round of credit stimulus in 2016 as the government pushed money into infrastructure to maintain GDP growth at around 6.5%.

China’s chief government forecaster has said that a predicted decline in steel demand would not happen in 2017 as a decrease in steel use by the property sector this year would be offset by strong railway, port and highway construction. He said that China’s crude steel production would rise by about 0.3 per cent with a further reduction in exports.

It seems then, with real Chinese domestic demand improving and exports declining, partially as a result of anti-dumping legislation being enacted across the world, that the near term prognosis for the global steel industry is better than it has been for some time. At 23.9MT in Q4, Chinese exports are still highly elevated, by historic levels, at a level above the total annual figure for Italy, however, so any small percentage change to the demand outlook in the country would have a profound effect on the industry as a whole.

Chinese Steel Demand Improves

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