IREPAS: Slightly better conditions in global long steel market but significant risk still exists

Conditions in the global long steel products market are slightly better as we can see a “better” supply and demand balance in China and the US due to output cuts at the end of 2015 and amid the restocking cycle in North America and Europe during the first quarter of 2016.  On the other hand, there has not been much  improvement on the demand side. Buyers are very hesitant and the retreat of raw material prices has not helped. The lack of improvement on the demand side suggests a significant risk for the aforementioned slightly better market scenario.

 

 

In terms of global steel production, capacity utilization figures are closer to 2009 than any year since then. Even in 2009 China roared ahead with good numbers and increasing tons, but unfortunately this is not the case in 2016. If the current average capacity utilization around the world is between 60 and 65 percent, such should be enough to create longer lead times and a slow rise in prices. However, this has not occurred yet.

 

 

Long steel product output is indeed decreasing but more output cuts still should and will be made, as plenty of offers are coming for every possible deal and margins are being squeezed to economically unworkable levels. The market might have hit the bottom or in other words entered the final phase, meaning this is the worst period that has been experienced so far. 

 

 

China has seen an almost six percent drop in its steel consumption against which its steel output has only dropped by about two percent. As a result, total steel exports from China are up by another 30 percent. According to Worldsteel figures, world steel consumption is down by around two percent, whereas output is down by almost three percent. Since China represents almost half of the global steel output, this means the rest of the world has reduced output by four percent. The figures suggest that the Chinese mills are eating up the share of non-Chinese mills, with the backing of state resources.

 

 

Nowadays almost every steel mill is announcing losses, including the Chinese mills. The situation with the Chinese mills is probably even worse than the situation of other mills worldwide, but it does not hurt them as much as it hurts the others. 

 

Sharp surge in trade cases in 2015 

 

Given the increasing losses incurred by steel mills, the number of trade cases exploded in 2015. Protectionism has become more prominent in different areas to safeguard domestic and regional producers from Chinese and Russian steel. More trade cases are expected until market forces will pressure them to slow down so that the world can reach a supply and demand equilibrium. Such a slowdown might be seen towards the end of the year if not the middle. Even if the impact of trade cases will not be instant, in the medium term we will see a stronger position for local mills in their respective markets.

 

Nevertheless, there are more homologation applications in progress than ever seen before. These applications suggest that blocking one single “enemy” will not stop the next one or will even widen the door. Local mills have significant problems in lifting prices in the short term because of such severe competition.

 

At the same time, China is receiving real “wake-up calls” from the rest of the world. Both the US and the EU are expected to announce trade cases against cold rolled steel coil imports from China. 

 

 

The worldwide economic situation does not give much hope either for a stimulation of and increase in demand, which seems to be the only chance for the industry to raise prices in the short term. 

 

 

The current market prices are much lower than the lowest observed after the 2008 crisis. Oil prices at around $30 a barrel, iron ore prices at around $40/mt and scrap prices being where there are today make it quite difficult to cope and do business as margins are squeezed drastically. The fact that the outlook for iron ore is still negative allows no chance for scrap prices to move up. 

 

 

The level of competition in the global long products market is at its peak. As the market has shrunk, not alone due to global economic and geopolitical problems, but also because of antidumping cases, safeguard measures, Chinese exports and above all locally increased capacities in traditional markets, everyone - from producers to traders - is fighting to protect what they have and trying to get a fair share of the market. The competition is very strong especially due to Chinese and Russian suppliers. There is no economic logic in the competition currently observed. It is at unreasonable levels and is simply a survival issue for most steel mills. 

 

Russian suppliers at present hold a lot of advantages: cheaper ore, cheaper power, cheaper coal, cheaper labour, cheaper logistics, and a very undervalued currency.  

 

The demand coming from Algeria is expected to slow down in the near future which will increase competition inside the EU market further due to a lack of alternatives. 

 

Iran will soon be in the market and wants to export more steel, both flat and long. 

 

The low oil price is restricting trade in some steel importing countries like Egypt and Algeria, but, in the meantime, it should help boost economic activities in developing countries. The situation in Egypt and Algeria is certainly not a positive for the market, and the worsening war in the Middle East is a negative. With geopolitical turmoil comes shifting trade conditions.

 

Under these circumstances, the market can be considered to be very unstable. Even though there has been a certain degree of stability lately, there are substantial downside risks in the global macroeconomic and political scenario that could impact market sentiment and jeopardize business conditions. 

 

 

Steel output is continually dropping, which shows that the industry is acting to take care of the problem. The speed is on the slow side as of yet though. Production cuts are forcing all players to make more careful calculations on their pricing system. The public is now more aware of the problems in the steel industry globally.

 

 

The poor financial performance of the whole industry everywhere is causing money and investors to run away from the steel business. This will force new production reductions in 2016 even at a more accelerated pace than seen last year, and will help restore the supply and demand balance. 

 

 

Steel mills reliant on scrap have found billet to be an attractive alternative. Billet producers can sell billets in most places achieving a greater advantage than if they were to roll the billets themselves. With global growth being on the low side and oil prices sliding, freight rates hit all-time lows during January, which has pressured the pricing of goods on CFR basis even though dock pricing has been fairly consistent. Energy is also much cheaper.

 

 

US domestic steel pricing has increased and domestic scrap pricing remains fairly steady.  Most stockists are short of inventory in the US market, where the economy is still on a positive trend. However, the expected production increase will take the advance out of pricing soon. If raw material pricing goes down in the US, this may be a further positive for the domestic mills. 

 

 

With lower pricing for ferrous scrap in the international market from January, demand for scrap has grown which may help stabilization of the scrap markets going forward.