‘Age of Profits’ ahead for flat producers?
World Steel Dynamics Managing Partners Peter Marcus and Karlis Kirsis told attendees of the Metal Bulletin & World Steel Dynamics 3rd Steel Success Strategies
Europe conference in London that one of the key developments in the new continuum for steel would be improved profits for flat producers.
Marcus and Kirsis contend that over the next decade profitability in strong markets will rise to record highs. At the same time, profitability in weak markets will not fall back to financially destructive levels seen in the 1990's and the early 2000's. Some of the factors that Marcus and Kirsis say will support their predictions include:
1) While spot steel prices will be more volatile in the coming years, the amplitude of the changes will be less than historically. This is because the steel market is more synchronized and steel buyers may change their inventory holding decisions more often than in the past.
2) Steelmakers will cut
production more rapidly than in the past when apparent steel demand weakens.
3) Steelmakers' costs will be under better control: The 2004-2005 explosion in
iron ore,
coking coal and coke prices was a one-time affair.
4) A growing number of upstream
investments will be made by steelmakers in order to secure lower cost supplies of
iron ore and
coking coal.
5) Pricing ’death spirals' – periods in which hot rolled coil prices drop to the marginal cost of average cost producers – are likely to occur far less frequently in the world export market.
6)
China's oversupply problem will be largely encapsulated within the country. This is because Beijing will play important roles in limiting steel exports and in encouraging
China's steel industry to adjust to the endemic oversupply by merging and adjusting
production.
7) The yuan will strengthen.
China's huge trade surplus and high levels of foreign investment could push the yuan towards a 20 percent rise against the dollar over the next five years.
8)
India will join
China as one of the regions for sizable capacity additions. Given its abundant high-grade
iron ore reserves, low wages, good locations for deep-water ports and the government's promise to build up the country's infrastructure,
steelmaking capacity additions will take off over the next 15 years.
9) Global steel trade patterns will shift.
China will no longer be the recipient of huge imports. EU mills will have trouble sustaining their exports due to high
production costs.
CIS mills will export less as demand rises in their domestic markets. Japanese mills, by far the largest exporters to
China, will surely face far lower deliveries to that market. The US market is likely to remain import dependant.
Focusing on near-term prospects, Marcus and Kirsis said that the global export price of hot rolled coil will remain weak over the next couple of months. However, favorable seasonal factors in the US and
Europe, a possible surge in
scrap prices, and strong demand from
China point towards a good chance (65:35 odds say Marcus and Kirsis) that the export price of hot rolled coil will rise in the first quarter of 2006. Even then, added Marcus, The second quarter could see prices plummet in a similar fashion to Q2 2005 if prices rapidly advance in the first quarter or if buyers add inventory at an unsustainable rate.
When asked about his predictions for raw material prices in 2006, Marcus said that he expects
iron ore prices to rise five percent in 2006. Looking to 2007, Marcus indicated that ore prices could actually decline due to a drop off in demand from
China during 2006. He said that annual
production in
China would likely drop to around 350 million metric tons in 2006, down from October 2005's annualized
production of 373 million metric tons.