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

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