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.
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.
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.
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.
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.
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.