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Steel industry, Chinese influence and the future

  • How China drove the industry?
  • What will affect the global demand in 2017?
  • Does the US have a role?

 

The steel industry is one of the largest industries globally. The growth in the steel industry is directly proportional to the economic health of a country as well as of that of the world.

2016 can be recognised as the finest year for the ‘grey metal’ as the steel industry saw a jump in steel prices by ~40% (January 2016-August 2017) after a decline of ~14% in the past 5-year period (2011-2015). The transformation in price trend was driven by a surprising improvement in the steel demand, particularly from China.

Furthermore, for almost a decade the steel industry was stricken by oversupply with surplus ranging from 100-125 million metric tons. The global steel production surged from 1.3 billion metric tons (2007) to 1.6 billion metric tons [(2016), (increase of 2.1%, CAGR)]. Similarly, the global steel consumption jumped from 1.2 billion metric tons to 1.5 billion metric tons (rise of 2.4%, CAGR), during the same period.

The impact of this imbalance in demand-supply was clearly seen in steel prices, which declined continuously from 2007 to 2015. 

The entire onus for this global steel situation goes to China, the biggest producer as well as consumer of steel. In the past 5 years, China contributed 45-50% to the global steel production and consumption. Moreover, since 2011, while the global production increased by ~1% (CAGR), China’s production jumped by ~3% (CAGR). Likewise, on demand side, the global consumption increased by 1% (CAGR) and Chinese demand surged by 2% (CAGR). China is expected to follow the trend in 2017 as its H1 2017 production has already reached 419 mm MT, which is higher than 401 mm MT in H1 2016.

China meets it consumption needs by internal production. However, traditionally, the nation has produced more than it could consume, thereby, exporting the rest to the global market. In last 5 years, China exported ~10% of its production and thus, added to the glut in the international steel market. The nation is also accused of dumping, which is of low-quality steel and most counties-regions (the United States, the EU and India) have retaliated by imposing ‘anti-dumping’ tariffs.

Thus, China reacted last year and vowed to cut down its capacity (in phases) in upcoming years, this was expected to ease the glut in the long-term. The country did shut down few steel mills, however, operational mills produced more than required steel and led to a growth of 1.6% in the Chinese steel production in 2016.

Additionally, despite the tariffs, China’s steel exports declined by a mere 3% (2016). This was primarily because China used an alternative route to export steel, particularly to the US. This was exercised through export of steel products to intermediate countries prior to the US.

Though, China can be criticised for building over capacity, producing more than the domestic demand and dumping the international market with the excess. However, the nation owes due credit for the steel price boom witnessed in 2016-17 (YTD). This was majorly driven by the surge in steel demand of ~2.4% in China (after a decline in 2014-15). This, in turn, was led by the stimulus provided by the Chinese government on the infrastructure investment.  

China was the key driver for the global steel industry, internationally steel prices broadly moved in tandem with Chinese steel consumption as summarized and validated through the below chart. The demand from China declined from 2011 to 2015, in fact, it turned negative in 2013 and 2015. On the other hand, demand from RoW increased by a whopping 12% in 2013. However, the steel prices continuously declined in 2013, thereby, discounting the significant jump in demand from the RoW. China’s demand increased by 3.4% and as a result, steel price shot up by ~17% in 2016. 

In 2017, China had driven the global steel demand as well as prices. Thus, going forward (in 2017 and 2018), the global demand is expected to continue to grow, driven not just by China, but by the United States and developing countries as well. China has shown signs of a slowdown in Q3 2017, hence, its demand may stabilize over the next 12 to 15 months (but will remain positive). The demand from the US is also expected to grow on the back of rising infrastructure spending, which is one of the priorities for President Donald Trump as reflected in his recent announcement to speed up the approvals for roads, bridges and highways.

The steel demand is expected from developing countries, among these Russia, Brazil (driven by stabilising economies) and India (driven by increased public spending on roads, power, water and gas pipeline projects) will also display growth. Thus, the global steel production is likely to stabilise at current levels.

The change in price trend observed in the industry (2016-17) infused optimism in the market. Hence, the overall buoyancy in the market together with a projected change in demand and supply will drive the price going forward. Although the rally is not expected to be very sharp. However, prices are expected to stabilise at the current level or increase marginally (on an average) in short to medium-term (2017-18).

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