WSD places the odds at 60:40 that, for steelmakers in most countries, 2016 will be an even more threatening year:
What Similarities versus 2015 are expected?
THE GOOD NEWS FOR THE STEEL MILLS
• Trade suits filed by steel mills in many countries, including the United States, are successful in sharply reducing Chinese steel product deliveries. This development so discourages the Chinese mills that, with demand also withering at home, they consider more draconian actions to permanently reduce capacity.
• M&A activity rises significantly because so many steel plants are for sale at bargain prices. More steel mills seek to combine with others despite lack of funds.
• The rising importance of downstream steel-mill-affiliated steel fabricating, processing and distribution capacity now that long-term steel oversupply becomes the most likely scenario. For sure, with substantial related downstream deliveries, a steel mill’s operating rate tends to be more stable and deliveries of higher-profit-margined products enhanced.
THE BAD NEWS FOR THE STEEL MILLS
• Steel demand declines further in much of the world due to lagging fixed asset investment activity. The importance of the Capital Fundamentalism economic theory, whereby fixed asset investment growth is the key to economic growth, is demonstrated to be valid not only in China.
• The current rally of hot-rolled band prices on the world market – which WSD deems to be a “technical” rally because the mills needed a higher price to lessen the speed of their march towards financial suicide – is not sufficient to significantly relieve the adverse financial pressures on many steel mills.
• Global steel production probably falls another 3%, after a 2.5% drop in 2015.
• Notwithstanding their trade suits filed in 2015, the USA steel mills still face significant import competition from many countries; although not from China against which they’ve succeeded in creating a “Fortress America” situation via the impositions of sizable anti-dumping and countervailing suit tariffs and duties.
• The USA dollar remains strong versus many currencies which, all other things held the same, drives down world steel export prices. Also, currency factors and reduced prices for steelmakers’ raw materials have flattened the World Cost Curve, which enhances price competition.
• Demand for steel remains slack in most energy-reduced markets. There’s “double trouble” for the mills: Lower OCTG deliveries and steel consumption in oil exporting countries that are cutting back capital outlays due to revenue shortfalls.
• The market value for older steel plants is severely diminished if they are facing major catch-up capital expenditure programs to reinstate or sustain their competitiveness (as we saw when the Sparrows Point plant in the USA was closed and then the assets liquidated in 2012).
Shifting Odds for Non-Chinese Steel Industry: 2015 to 2018
| New | Old | New | Old | New | Old | |||
| Scenario | ----- 2016 ----- | ----- 2017 ----- | ----- 2018 ----- | |||||
| Shake-out times | 60% | 30% | 15% | 15% | 10% | 10% | ||
| Bad times | 25% | 50% | 20% | 20% | 15% | 15% | ||
| Fair times | 15% | 20% | 30% | 35% | 25% | 20% | ||
| Good times | 0% | 0% | 25% | 20% | 30% | 35% | ||
| Boom times | 0% | 0% | 10% | 10% | 20% | 20% | ||
| Source: WSD Estimates | ||||||||
This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.
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