By Kyle Mason, field credit analyst, Coface, the international trade credit insurance company
According to forecasts from the World Steel Association (WSA), global steel markets are expected to remain constrained in the short-term as a sustained slowdown of the Chinese economy, political instability in many developing countries and unsettled financial markets continue to result in decreased demand.
World crude steel production reached 1,621 million tonnes (Mt) in 2015, down 2.9% compared to 2014. In 2015, China accounted for 44.8% of the global market for steel (by volume) compared to 45.9% in 2014.
The excess supply from China has led to the governments of the other primary steel producing countries providing assistance in the form of import protection to ensure the survival of their local steel industries.
Data from WSA indicates that steel use remained stable in 2016 at 1,501 million tonnes following a contraction of -3.0% in 2015, with minor growth of 0.5% expected for 2017.
Unfortunately with steel use at these levels, the global oversupply of steel remains above 100 million tonnes per annum. This is approximately three times more than the entire African continent’s consumption in 2015.
The Developed World
Demand for steel in developed economies is expected to display an increase of 0.2% in 2016 and projections suggest that this will rise by a further 1.1% in 2017. This has been led by the recovery in the EU’s steel demand, which appears to have remained on track despite heightened uncertainties following the UK referendum on Brexit.
Meanwhile, the UK’s steel demand is expected to reduce due to the referendum result, the full extent of this decision is difficult to predict. The full impact of Brexit will have to be measured over the longer term.
Steel demand in the US appears to be struggling at the moment despite the firming of the US economy. A strong US dollar has made US exports more expensive, thus affecting their manufacturing sector. Unfortunately, this has also coincided with a collapse in shale-related investments. Likewise, Japan’s steel demand remains subdued due to structural issues which has also been negatively affected by the appreciation of the yen after the UK referendum.
According to the World Steel Association, global crude steel production reached 1,628.5 million tonnes (Mt) for the year 2016, up 0.8% compared to 2015. Annual production in Asia was 1,125.1 Mt of crude steel in 2016, an increase of 1.6% compared to 2015.
China’s crude steel production in 2016 reached 808.4 Mt, up by 1.2% on 2015. China’s share of world crude steel production continued to expanded as it increased its share to 49.6% in 2016.
Chinese GDP growth in 2016 is expected to be at its lowest since 1990. To reduce the impact of rebalancing, the Chinese government has issued a number of mini stimulus measures. These are not expected to reverse the declining demand for steel but rather reduce its severity. Steel demand in China is projected to decline by -1.0% in 2016 and by -2.0% in 2017. The weak demand means Chinese mills are facing overcapacity, which will take a number of years to normalise, and this has led to the export price of Hot Rolled Coils from China dropping below the cost of production.
In the rest of region, Japan produced 104.8 Mt in 2016, representing a decline of 0.3% when compared to 2015. South Korea produced 68.6 Mt of crude steel in 2016, a decrease of -1.6% compared to 2015.
Domestic – South Africa
The domestic and export markets in which South Africa’s steel producers operate continued to be constrained with minimal growth as a result of import substitution and minimal local investment and infrastructural spend.
In early 2016, South Africa’s largest steel producer ArcelorMittal applied for protection from local government in an effort to save the local steel producing industry that subsequently resulted in a 10% import tariff being imposed on ten separate steel import classifications. Despite this, local steel producers have still had to contend with an challenging environment, as the South African and key African markets continued to import large quantities of steel, with an estimated 1.2 million tonnes of steel being imported into the country in 2016.
According to data released by ArcelorMittal, South Africa’s apparent steel consumption decreased by 3.4% in 2016, as a result of subdued economic growth.
While domestic steel demand is expected to remain subdued due to low economic growth in 2017, there is some encouragement for local producers as South African authorities recently approved the designation for local steel in state-infrastructural projects.
Depressed growth figures in key market segments (manufacturing, mining and construction), combined with limited infrastructure-related investments and reduced housing development have all negatively affected the steel industry.
However there is some encouragement for local producers as local authorities recently approved the designation for South African steel in state infrastructural projects.
ArcelorMittal South Africa interim reports indicate that the company succeeded in dramatically reducing both its operating and headline losses in 2016. The report suggests that these performances were achieved through an 8% increase in average net realised steel sale prices, sustainable cost improvements and a reduction in once-off items.
Mittal’s capacity utilisation also improved from 80% to 83%, with total sales volumes up by 10% (210 000 tonnes) against the comparative period in 2015, which the company believes is primarily due to the 10% import duties, combined with market restocking and the closure of Evraz Highveld Steel.
Local sales increased by 15% in 2016, however this was partially offset by a 5% decrease in export sales. Mittal’s liquid steel production for the first six months of the year was 2.5million tonnes, which represents a decrease of 43 000 tonnes compared to the first six months of 2015. However, this may be partly attributed to the closure of Vaal Meltshop at their Vereeniging Works.
ArcelorMittal and the Industrial Development Corporation (IDC) are investigating options, together with the Business Rescue Practitioner of Evraz Highveld Steel and Vanadium Limited (Highveld), of supplying blooms and slabs to Highveld for processing into heavy structural steel.
If successful, this could result in the re-opening of the heavy section mill by the Business Rescue Practitioner, making available the supply of heavy structural products into the South African market. It is anticipated that the blooms and slabs would be processed by the heavy section mill into heavy structural steel initially in terms of a one-year agreement.
Carbon Tax Bill
Despite the tough economic conditions under which South African steel producers are operating, key environmental projects remain a focus area to ensure environmental compliance. The proposed implementation of a carbon tax bill by the National Treasury remains a concern as the South African producers financial recovery and competitiveness will be affected.
ArcelorMittal actively participated in the Department of Environmental Affairs’ carbon budget setting process during the second half of 2015, but no final carbon budget has been declared yet.
According to the WSA, steel demand in emerging and developing (excluding China) economies is expected to expand by 4.0% in 2017, as previously underperforming emerging economies are showing signs of stabilisation.
India’s steel demand is expected to report solid growth in 2016-2017 backed by consumption-boosting reforms and infrastructure investment, but its sustainability is under question as key levels of investment are being provided by the government while private investment remains weak.
Brazil, after two consecutive years of double-digit contraction, is showing signs of a moderate recovery in 2017 and is therefore expected to increase its appetite for steel. The rebound in oil prices appears to have helped stabilise the economic decline in Russia and prevent further deterioration of the Mexican, South American and GCC economies.