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.

Bosnian Steel Imports Grow

At ISSB we are constantly searching for new countries to add to our ever-growing database and I am pleased to announce that we have recently added Bosnia, which further enhances our coverage of non-EU European countries.

Although relatively modest, Bosnia is a growing producer of steel and in 2015 the country made 819K tonnes of crude steel, an increase of over 3% year on year when many countries have seen declining production.  It has recorded growth each year since 2009 with a 58% increase over that time.  The only producing plant in the country is Arcelor Mittal’s 51% owned Zenica facility which, as well as having both a blast furnace and an electric arc furnace, also produces Billets and various long products.

Exports grew by 12% year on year, driven by a 21% growth in wire rod shipments and a 42% increase in rebar exports.  In the more niche areas, the country also exports wire and steel castings.  The main markets for the country’s exports are Eastern EU states and other former Yugoslav countries with Serbia, Romania and Kosovo together making up just under half of all steel exports.

Bosnia is a net exporter of steel but imports also grew in 2015 with a 17% increase when compared to 2014 with imports of coated sheet and welded pipes driving the growth.  Italy is by far the largest supplier of steel to the country, with about a third of imports originating in the country but Serbia, Slovenia, Macedonia, Germany and China also ship decent quantities.

The country is well supplied with its own raw materials and is a net exporter of coke and scrap and has also traditionally been an exporter of iron ore to Poland and the Czech Republic.  Since September, however, they have been importing iron ore from Brazil, presumably as locally mined ore has become uneconomical given the collapsing price of the commodity last year.  The other main raw material import is coking coal, which is imported from the US at a fairly consistent rate of about 1.3M tonnes per annum.

Although not immune to the wider economic woes in Europe, Bosnia’s GDP growth has held up relatively well, running above 3% for the past two quarters and with no domestic producers of flat steel products, the country should remain a fairly robust, if niche, market for organic coated sheet and HDG steel in particular.

For further information or similar analysis on other markets, please contact us at ISSB or visit our website.

Turkey’s Imports of Semis Ease as Scrap Price Declines.

As Turkey is by far the largest importer of steel scrap, any changes in domestic demand can have a significant effect on the wider market for this commodity. In line with many other raw materials and steel products, the price of scrap has been declining over the past few years and by August 2015, the price had fallen by 37% in just a year. This decline was not as pronounced as the fall in slab prices, however, as they fell by 44% over the same time frame.

As other steelmaking costs had not fallen to the same degree, we saw that some producers in Turkey, instead of producing the semi-finished products internally, favoured importing slab and billet. These imports came from countries such as China and Brazil where the cost of the predominantly BOS dominated steelmaking had fallen considerably, and slowing internal demand had driven producers in those countries to search for export markets.  As the year progressed further, however, the decline in the price of scrap accelerated and by October, scrap prices had fallen 55% from our reference point in mid-2014, compared to slab prices that declined by 50%.

In the first eleven months of 2014, Turkish imports of semis fluctuated between 291K tonnes and 488K tonnes per month before rising to 597K tonnes in December. As the differential between the price of scrap and semis narrowed during 2015, we can see that Turkey imported increasing quantities of billet and slab, peaking at 841K tonnes in September.  During the last quarter of 2015, however, as the price of scrap went on another decline, Turkey started to ease up on its imports, finishing the year with 504K tonnes in December which was actually below the same month of 2014, the only time that happened during the year.

This pattern of semis imports was mirrored in the imports of scrap. Throughout 2014, Turkey averaged 1.6M tonnes of scrap imports per month but in December this declined to less than 1.3M tonnes. By September 2015, just when the tonnage of semis had reached its peak, the quantity of scrap imported hit its lowest level, down to just over 1M tonnes before rebounding strongly to finish the year at over 1.7M tonnes in December.

At the start of this year, the scrap/semis price differential has narrowed somewhat with both scrap and slabs having fallen by 54% from our benchmark in 2014. Is this enough to encourage Turkish producers to increase their imports of semi-finished products once again at the expense of scrap?  Of course, given its size and ability to move the scrap market, lowering demand for scrap in the country due to falling semis prices will have a knock on effect, further lowering the price of scrap in a race to the bottom.  With many steelmakers, particularly in China, now running at a loss, however, it does seem as though the bulk of the decline in semis prices is probably behind us which would suggest that in the medium term, Turkish steelmakers are likely to return to the scrap market for their raw material requirements.

Chinese Trade in Coal and Coke

We have covered the trade in Chinese steel and iron ore in considerable detail here in the past but ISSB also monitors the trade in some other products and today we are looking at the Chinese coal and coke trade. China is the world’s largest producer and consumer of coal but the country only became a net importer in 2009.  Since then, Chinese imports of coal increased by over 150% to peak at 327 million tonnes in 2013 with internal production estimated at around 3.7 billion tonnes.  Since 2013, however, it has been a familiar story with reduced industrial demand leading to falling imports, which in 2015 were down 36% from the peak just two years prior, and an over capacity situation which is estimated by Reuters as being an astonishing 2 billion tonnes last year.

China imports most of its coal from Australia and Indonesia and the price of Australian hard coking coal has nearly halved since the end of 2013 to just over $76 per tonne as of the end of last week. The Chinese Government has responded by stopping approvals for new coal mines for three years but given the current huge overcapacity, this is unlikely to make much of a dent on falling prices.  In addition, however, there are plans within China to reduce capacity by some 70 million tonnes internally but again, given the estimated 2 billion tonnes of overcapacity, it is hard to see this having much of an effect either given the predicted fall in industrial demand for the raw material in 2016.

One option for China to use this excess coal being produced is to turn it into coke, subject to coke oven capacity, and in contrast to coal, China is a net exporter of coke and is the largest supplier in the world. Last year Chinese exports increased further, up more than 11% when compared to 2014 and represented close to a nine-fold increase in exports since 2012.   At the start of 2013, the 40% tax on metallurgical coke exports from China was removed, despite the detrimental effect on air quality on production of the material, opening the door for supply to enter the already oversaturated global market with predictable consequences on prices as export prices fell by 47% over the past three years.  The largest markets for Chinese coke are India, Japan and Brazil but as with steel, there is evidence that in some of these countries measures are being taken to protect domestic producers with India initiating anti-dumping procedures against imports of coke from China.

Going forward, it is hard to see any of the government initiatives having much of an effect on the coal producing overcapacity situation in China and as with coal, global demand for coke is weak. Unless the export tax is reinstated or markets are successful with their anti-dumping initiatives, downward pressures are likely to remain on the price of coke as well as coal, with fundamentals which closely mirror those that we have seen in iron ore and steel.

 

US Steel Imports Fall Following Anti-Dumping Measures

Following a steady recovery from the financial crisis of 2008/2009, the US economy is now at a stage where the US Federal Reserve has been able to double interest rates from their historic low of 0.25%, where they have been for the last seven years.

This recovery had been filtering through to an increase in apparent demand for steel in the country with the total in 2014 12% above that of the year before and an 81% increase on the total in the trough year of 2009.  This trend does not seem to have continued into this year, however, with the latest forecast for 2015 showing a 3% decline when compared to last year.

What’s more is that so far this year this reduction in demand has been most keenly felt by domestic producers with US crude steel production falling by 10% in Q3 and 9% so far this year to date.  At the start of the year, the strength of the US dollar and general health of the economy had encouraged a large growth of imports with Q1 up an incredible 21%.  The US government has been quick to recognise the danger to domestic suppliers, however, and have erected trade barriers against cheap foreign imports.  This action has been successful and we have seen a 12% decline in imports in Q2 and a 20% crash in imports by Q3.  This means that year to date, US imports have declined by 5% which is likely to fall further before the year is out.

The largest decline has been seen in imports from Russia which halved to 587K tonnes in Q3.  Other big declines have been seen in shipments from South Korea, down 38%; the UK, falling 57%; and Italy, down 49%.  Shipments from China have also declined, falling by 29% but at 555K tonnes, they remain significant with some 164KT of CR flat products being imported along.  This helps explain why on Wednesday, the US slapped import duties of up to 227% on imports of cold-rolled flat steel from China.

Although imports into the US from most origin countries declined, shipments did increase from Brazil, who much like China, has been exporting increasing amounts of steel due to a weakening economy hitting demand internally and a depreciating currency making their products comparatively cheaper.  Uniquely, the country has also been benefiting from ever lower costs of locally sourced raw material.  Overall, imports of steel from Brazil grew by 9% in Q3 to 1.2M tonnes and semi-finished products, which have traditionally dominated imports from the country, have been declining with the growth coming instead from increased imports of hot rolled coil, cold rolled flat products and galvanised flat steel products.

Whilst the decline in US steel demand is of some concern to local producers, the agility and fervour with which the government is able to protect the industry against perceived unfairly priced material being imported from abroad offers a level of protection for them and at the same time likely to increase displaced tonnage hitting the markets of other countries, particularly within the EU where anti-dumping decisions are less rapid.

Chinese Exports Hit Record Levels – November 2015

We have covered the growing importance of Chinese exports here several times before, commenting that Chinese producers have been able to get around the government’s ending of the tax rebate of the export of boron steels by replacing boron with other alloying elements, most notably chromium.

This growth shows no sign of abating and the latest September export figures for China show that they exported a record amount during the month with the total of 10.8 million tonnes being nearly 10% higher than the previous highest tonnage. With the year to date figure nearly 30% ahead of last year, 2015 will be a record year with the total very likely to be above 100 million tonnes which will be the first time in history any country country’s exports have crossed this milestone.

The destination of these increased exports is varied. Chinese steel producers have targeted the EU with a 42% increase in shipments to the region with exports to Italy, Spain and Belgium showing particularly high growth levels. Emerging markets have also been targeted with shipments to Africa up 62% and the Middle East increasing by 27% but it is the Indian subcontinent where exports have really taken off with shipments to India growing by 33%, Pakistan up by 86% and Bangladesh increasing nearly six-fold. South Korea remains the most important market by tonnage for Chinese steel but with shipments increasing by a modest 6% it is clear that other, newer markets are being targeted. In contrast to most other countries in the world, by introducing tough anti-dumping measures, the US has managed to limit the flood of Chinese steel into their market, with shipments falling by 28% so far this year.

As we have noted previously, in order to gain tax rebates from the Chinese government, the steel producers in the country routinely add alloying elements to their steel and so far this year an incredible 76% of all Chinese exports are categorised as “alloy” steel. There has been a large increase in many products with HRC and wire rod both increasing by more than one million tonnes but the real growth has been in “alloy HR bars” which have doubled to an astonishing 22 million tonnes in the first nine months of the year. The truth is actually somewhat different as this category has become a bit of a catch-all for Chinese exporters with everything from billets to rebar to genuine alloy bars being included under this heading.

With the WSA forecasting the demand for steel in China will decline by 3.5% this year and another 2% next year, it seems likely that Chinese producers will continue to target export markets and unless excess capacity is drastically reduced within the country, which is not a popular political decision, exports are likely to remain at least at these elevated levels for the foreseeable future.

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.

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.

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.

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.