Global steel industry analysed

The global steel industry has been subject to a number of significant changes since the start of the millennium. This article looks are market trends.

The global steel industry has been subject to a number of significant changes since the start of the millennium.

It started with China's emergence as the major force.

Steel prices suddenly came to life with unprecedented increases through 2004 followed by substantial decreases in 2005.

Moreover, e-business portals came and went.

The LME steel contract was postponed in favour of plastics.

The MEPS online price service was put in place to provide benchmark steel product prices to meet the needs of steel customers.

Consolidation within the steel sector is now high on the agenda and the once, impossible is now becoming a practical necessity.

The rapid rise in world steel output and demand is mainly the result of higher economic activity in China and the resultant expansion of steelmaking by the domestic producers.

Approximately 80% of global steel production and 72% of consumption over the five years from 2000 to 2006 can be attributable to China.

Over the period, Chinese steel production will have increased by 220 million tonnes (170%) whilst in the rest of the world, the estimated equivalent figures are 54 million tonnes (7.5%).

A similar picture can be seen for finished steel consumption - with Chinese demand growing by 180 million tonnes against the rest of the world's 70 million tonnes.

Chinese steel production in 2005 is expected to be 347 million tonnes: equating to 31% of global output.

By 2008 China's share of steel production and consumption are likely to have reached 32.7 and 32%, respectively.

With such dominance, the Chinese steel enterprises must exercise a degree of responsibility to the rest of the global steel industry and to their own shareholders.

If supply continues to exceed internal demand then global prices will inevitably decline to unprofitable levels.

The first stage of retaliation will be a spate of anti-dumping actions brought against any country which seeks to export its oversupply problem.

This situation may not be far into the future.

We do believe that the Chinese government will act to cut the rate of capacity increases in the steel sector in the medium term.

The current plans of most of the major steel manufacturers will probably be not allowed to come to fruition.

However, many big projects are already in place and cannot be stopped.

Consequently, we expect substantial growth in Chinese output to continue up to 2007 at least.

It is probable that all export incentives for the steel sector will be eliminated in the near term to regulate the anticipated flood which may take place soon.

China is not the only future growth area for the steel sector.

Indian steel mills have also big plans to expand capacity to meet the expected growth in internal demand.

Many of the projects will go ahead over the next two or three years.

In the longer term, foreign steel companies are making investments for steel manufacturing in India to build plants using the readily available local sources of raw material.

We believe that many of these may not meet their full design capacity in the time frame originally planned.

The high price of oil in recent times has radically changed the trade flows around the world.

The middle Eastern countries and Russia have been winners.

In contrast, steel consumption in the oil importing regions, including, North America, most of Western Europe, Japan and South Korea, is likely to be stifled somewhat as economic growth is held in check.

Raw material costs for steel-makers (iron ore and coking coal) moved up quite steadily for many years up to the start of 2004.

Consistently higher demand from China raised fears of shortages as the local producers of steel racked up output in 2003.

The increase was equivalent to almost the total output of the German steel industry.

Negotiations for 2004 contracts showed rises of 71% for sea-borne iron ore and 120% for coking coal.

On top of this, freight rates more than doubled.

These massive hikes were possible because it was thought that the raw material suppliers would be unable to meet demand.

In the event, global steel production rose by 87 million tonnes and shortages were only notable for two or three months in the second quarter.

The raw material and freight cost escalations at that time pushed up mill costs by around $US100/120 per tonne of finished product.

However, the steel makers were able to lift prices by much more than the cost increases as customers feared being without material for their production lines.

Pig iron production costs in Brazil are now reported to be near to $US230 per tonne.

Over the past two years carbon steel prices have been extremely volatile.

In the final quarter of 2003, MEPS domestic average hot rolled prices in Asia, North America and EU were at similar levels at $US340/350 per tonne.

By September 2004, North American values peaked at almost $US800 per tonne before declining rapidly to around $US550 per tonne in July this year.

In the EU, domestic hot rolled coil values rose to near $US700 by the end of 2004 but slipped back to $US530 per tonne in July 2005.

Asian prices never reached the dizzy heights applicable in the other two regions - rising to below $US600 per tonne in May this year.

A steady decline then set in.

The fear of shortages generated the backdrop for the massive price hikes around the world.

Customers placed orders well in excess of real demand.

The mills took advantage of the panic mode.

When it became apparent that orders could be met by the steel producers, customers reduced their order patterns and prices fell.

Steel is a heavily traded material across the world.

The US dollar is the currency for trade in raw materials and steel products.

Currency exchange rates therefore play a key role in determining the trade flows.

Freight rates are also an important factor; particularly since their substantial upturn in recent years.

High freight rates inhibit exports unless substantial regional domestic price discrepancies exist.

Political decisions, also play their part.

The US government's unilateral decision to impose section 201 safeguard tariffs' in 2002 had the effect of lifting steel prices around the world.

We expect more anti-dumping cases in the future, now that China is a net exporting nation.

Steel prices for a given product usually follow a similar pattern but the size of increase and timing of implementation can differ widely.

These price discrepancies generate rapid rises and declines in traded volumes over short periods of time as imports and exports become more attractive in different markets.

Long and flat product values move in similar directions.

However, the variation in price can be quite small - rising to $US170 per tonne at times.

The fortunes of the construction sector play a large part in demand for long products.

In contrast, consumption of consumer goods is a key driver for the flat products segment.

The main element in steel price movement is still the balance between supply and demand.

However, in the past two years, the cost of raw materials is playing an ever increasing role in the determinant of the floor prices.

It is now clear that the $US200 per tonne hot rolled coil selling price is a thing of the past.

In recent years MEPS had seen the need for developing benchmark prices for individual products across regions.

It was clear to us that a physical contract as proposed by the LME would be difficult to achieve - partly because the material is subject to corrosion, therefore keeping stocks is an impossible task.

Moreover, the industry has a large number of product categories and dimensions that finding a suitable product to monitor was and is very difficult.

We should remember that the steel industry is not like the metal's business.

Their structures are completely different.

The major metals producers usually operate from raw material extraction to production of a semi finished product used for further processing.

In the steel business, raw material supply is undertaken by separate mining companies.

The mills are integrated from melting to the production of finished products.

This means that there are substantially more buyers.

Many of them are also suspicious of any initiative promoted by the mills or financial institutions - hence the failure of e-business and the initial apathy for the LME contract from the majority of buyers.

Whilst discussions were taking place on the LME steel contract, MEPS was developing a range of steel price indices relating to the key finished products sold in the industry.

Steel customers indicated a need for benchmarking price movements for individual or a group of products within a region.

Using existing data obtained in research already undertaken in twenty countries worldwide, we developed monthly indices in three regions - EU, Asian and North America for seven rolled carbon steel products.

These were then grouped into flat and long products prices, plus a composite all products price for each region.

Finally, a composite global price/index was generated covering the seven products across the three regions.

One year forecasts were then produced for most of the indices available and the service was launched in March 2002.

Similar indices are being provided by others.

The big advantage that MEPS possesses is that historical date is available from 1997 for all regions.

The information is posted monthly on our website and is accessed on subscription.

The service is being taken up by government and commercial organisations with responsibility for commissioning major projects.

Main contractors, subcontractors and equipment manufacturers all utilise the service.

More and more enterprises are finding a use for benchmarking their main steel requirements.

The complexities of the steel sector are reinforced by requests to us for indices relating to electrical sheets, tinplate, ships plate and offshore special grades.

To meet some of these requirements MEPS will be launching its range of stainless steel indices and forecasts early in the New Year.

The indices were not specifically designed as a financial instrument for forward contracts.

The data is not built up on physical transactions but from researched data in the market place.

This means of collecting information does not, however, invalidate the pricing trends.

The need for benchmarking in the steel sector is reinforced by the 2500 subscriptions taken up for the service in the first eighteen months of its operation.

Many mergers and acquisitions have taken place in the steel sector in recent years.

The catalyst for this activity was the privatisation of British Steel in the late 1980s.

Rationalisation within the industry was almost impossible because the majority of steel companies outside Japan and North America were state owned.

Restructuring in Japan was unlikely because of complicated cross shareholding and the implications of lifetime employment.

Consolidation in the United States was not possible due to legacy costs from worker pensions and medical costs.

Much of the West European steel industry was state owned.

A stalemate prevailed for many years.

Furthermore, many governments saw the steel as a strategic industry.

The picture changed with the privatisation of British Steel.

The success of the company in its early years prompted many other governments to sell or substantially reduce their stakes in their steel enterprises - particularly in the European Union.

This was then followed by the big merger in Japan between NKK and Mitsubishi to form JFE.

The opening of the Iron Curtain provided opportunities for many of the East and Central European states to divest their steel industries.

Government assistance in the US helped to unlock the problems of legacy costs to facilitate acquisitions.

The fashion of privately owned steel enterprises is spreading around the world into South America and several parts of Asia and the former USSR.

Consolidation started with inter-regional transactions.

This was quickly followed by inter-continental mergers and acquisitions.

This latest form was pioneered by the Mittal Steel Group but others are now taking this route.

Inter-regional rationalisation has proved very successful for the steel makers.

Larger groupings have led to opportunities for restructuring and improvements in operational efficiency.

This, however, has not been the only benefit.

Reduced competition in the market place has given the mills more opportunities to respond to changing situations.

They are now more nimble in their actions, resulting in more rapid price adjustments and output control.

Without consolidation it is unlikely that recent price levels would have been achieved.

Moreover, it would have taken much longer to establish the significant production cuts that have taken place in the major markets.

The emergence of a market leader with a substantial share of the supply also gives a degree of discipline by taking decisive actions which the smaller enterprises often follow.

The success of past consolidation in the steel sector is a guarantee that more will follow.

Inter regional rationalisation will take place as the smaller mills link up to leave, perhaps, four or five groupings.

Competition regulators will not allow the major steel-makers to expand much further within a region or country.

International mergers and acquisitions are likely to extend as the current leading steel producers try to build up their influence across the world.

Back to top