The tumult in financial markets will spill over into the ‘real’ economy in a number of ways not least of course in slowing economic growth on regional and global levels. Slower economic growth means less steel consumption and production so it’s worthwhile, if a little sobering, to contemplate just how hard steel might be hit.
There have been three periods of significant global steel production decline in the last 50 years. The first covers the period of 1974-75, the second from 1979 to 1982 and the third 1989 to 1992. The respective cumulative declines in production were 9%, 14% and 8% respectively.
If the current slowdown in the industry were to be as deep as the deepest of the declines (14%) we would see steel production off some 190MT from 2008 levels. But if we take the average percentage of the three declines for each region we get an aggregate global steel production decline of just 5% or 70MT. A drop of 190MT would imply global capacity utilization in the mid-70%’s; a drop of 70MT would imply a utilization rate in the low 80% range.
But while it’s necessary to look at worst case scenarios there’s reason to believe that things won’t be as bad in the next couple of years as these prior declines might suggest. The current steel industry environment enjoys a number of signficant differences when compared to those of 20 and 30 years ago.
- First, global economic growth in each of those earlier periods was between 1% and 2%. The October GDP forecast from the IMF shows global growth dipping to about 3% in 2009 but sustaining growth at about 4% over the three year period through 2011.
- Second, in those earlier periods, outside of Korea there were few large rapidly industrializing economies. In fact, the global economic order was changing dramatically. The Eastern Bloc collapse in the third period of decline marked the end of centrally planned economies and the obliteration of a large portion of industrial demand. In contrast today many of the major steel producing regions of the world are industrializing and, even if very slowly in some cases, liberalizing with expectations of continued robust growth for some time. In the examples mentioned above China and India grow at -1% in the worst case scenario and 0% in the ‘average’ decline scenario. The last World Steel Association (IISI) short term forecast (from April) showed Asia & Oceania growing at 8% p.a. in apparent steel use. Even if this rate is halved in the revised forecast to 4%, then our Far East production growth would amount to 30MT reclaiming in one year almost half the ‘average’ scenario decline of 5% . [click to continue…]
July wire rod imports reported in our earlier post have been revised to 94,000 tons. The earlier figure was incorrect because it did not account for a change in wire rod import codes put into effect in July. See the updated spreadsheet below.
There has been a lot of news lately about how the largest iron ore producers want to change the traditional yearly contract negotiations with their biggest customers. If you are trying to follow what’s going on and you need some background on the iron ore market and history, you can get some answers online through the sources below. All the sources are free except the subscription pricing data described at the end of the post.
Who are the biggest iron ore producers?
USGS (U.S. Geological Survey) publishes the Mineral Commodity Summary on iron ore which lists the output of the largest producing countries and their reserves. I have already mentioned the publications of the Raw Materials Group and UNCTAD in an earlier post, but RMG also have a good summary of the largest producing companies (as well as a general view of what’s going on) in the abstract describing their report The Iron Ore Market 2007-2009.
How much seaborne trade in iron ore is there?
The Australian Bureau of Agricultural and Resource Economics (ABARE) has a quarterly report called Australian Commodities where it lists the largest importing and exporting countries, describes the current pricing issues, and gives market and pricing forecasts. Metallurgical coal is also discussed in that document, for those who are interested.
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Crude steel production in China declined 5% from 44.9 million metric tonnes in July to 42.6m tonnes in August. Net exports increased from 5.8m tonnes to 6.4m tonnes, and the export share of finished steel production continued its climb from 18% in July to 20% in August.
US long products imports licenses dropped to 207,000 short tons in August compared to July actuals of 212,000 tons. This is due mainly to lower licenses for importers of rebar (where licenses reached 69,000 tons in August compared to July actuals of 97,000 tons) and wire rod (62,000 tons licenses in August compared to 87,000 tons July actuals). You will also notice in the data below that July license applications were (unusually) much higher than actual July imports by 28%. This was mainly the result of wire rod imports which were much lower at 36,000 tons than wire rod licenses at 87,000 tons, most likely because of turmoil related to the June 3rd US International Trade Decision on sunset reviews for wire rod imports.
NOTE: There’s an updated (for Q4 2008), revised (in Q1 2009) & expanded version of this presentation here:
Here’s a shortened version of a presentation I made last week to the MSCI Economic Summit: Forecast 2009 meeting in Chicago. It’s a great event if you get the chance to go.
The essence of what I said was 1) China’s continued growth will underpin the pricing of raw materials and that will provide a floor to steel product pricing 2) Absent a(n unlikely) rapid change in the value of the $, US steel exports will be sustained and imports will remain in relative check 3) The changing structure of the industry (consolidation, integration & cross-border ownership) supports a disciplined approach to capacity management & formation making any softness in pricing likely to be temporary and relatively shallow. 4) Above all, not all commodities will behave in exactly the same way. The fundamentals for steel are still very good – even if prices go down, margins can be sustained and perhaps even enhanced. This may not come through in this shortened version but that’s what I meant.
