Global steel industry expected to return to growth

1 February 2016

The global steel industry is expected to edge back into growth this year in spite of waning Chinese demand, at a time when low prices for the metal are casting a shadow over producers.

World production of crude steel will rise by 0.15 per cent in 2016, according to a Financial Times survey of 18 analysts, with renewed expansion in the US and Europe offsetting a second consecutive year of contraction in China, which makes nearly half of all steel.

Any pick-up in a sector viewed as an indicator of global economic health will come after a difficult year that saw the first annual production decline since 2009. Output shrank by 2.8 per cent in 2015, according to the World Steel Association.

However, several of those polled predicted a continuation of the tough market conditions that have pushed many producers into losses.

Ingo Schachel of Commerzbank said: “It will continue to be a challenging year for global steel companies. Profit margins and price levels [are] still very unsatisfactory and it’s hard to see a short-term improvement.”

A supply glut and faltering demand made steel cheaper in 2015 than at any time in the past decade. Four of the world’s biggest producers — ArcelorMittal, US Steel, SSAB of Sweden and Tata Steel of India — have either had their credit rating downgraded or put on negative outlook by Standard & Poor’s since November, while Posco of South Korea recently posted its first annual loss.

Some relief could come from a reversal in the surge of cheap exports from China, which has been seeking overseas buyers as its economic slowdown hits domestic use and which many companies blame for the dramatic fall in prices.

With China’s production expected to decline by 2.2 per cent, two-thirds of analysts who responded said its outbound shipments would remain flat or decrease in 2016, following a 20 per cent jump last year.

John Lichtenstein of Accenture, said: “Were this to happen, the modest demand growth increases forecast for the US, the EU and other markets should support operating rate increases and somewhat higher prices. However, upward price movement will be constrained by continued very low raw material prices.”

The US steel industry is expected to swing into growth of 3 per cent this year following an 10.5 per cent contraction in 2015. A more modest uptick of 0.9 per cent is forecast for the EU, where 1.8 per cent fewer tonnes were produced last year.

Seth Rosenfeld of Jefferies said European steelmakers which sell higher value-added products were better placed to withstand import pressures.

“But producers of commodity-grade steels risk both market share loss in addition to pricing pressure,” he added.

A number of anti-dumping trade cases under way in the US and EU, targeting countries such as China and Russia, could boost domestic steelmakers by in effect blocking some imports.

Yet such moves do not address the root cause of the industry’s woes — chronic overcapacity — and will simply divert the flow to other regions, said Michael Shillaker of Credit Suisse.

He added: “We think 2016 could mark the start of some material [plant] closures, should banks and shareholders begin to refuse further liquidity. It could also see the most significant wave of bankruptcies and protectionist moves since 2002.”