Difficulties in emerging markets adversely impact long steel business

The annualized crude steel production of the world steel industry in December last year decreased to 1.521 billion metric tons as the average daily rate of production declined by 2.5 percent in the given month compared to the previous month. The capacity utilization rate of the industry was 74.2 percent in December. According to the World Steel Association (worldsteel), the 65 countries reporting actual results produced a total of 1.582 billion metric tons of crude steel in 2013, representing a 3.5 percent increase year on year, while worldsteel estimates that total global production in 2013 including non-reporting countries reached 1.607 billion metric tons, with both totals constituting new records! Worldsteel also announced that the crude steel production in 2013 exceeded the 2012 volume by 67 million metric tons, according to the figures of the 65 reporting countries, with China responsible for 98.7 percent of this increase. An extra 49 million metric tons of iron were produced in 2013 compared to 2012, with China accounting for 99.8 percent of this growth. And, finally, global apparent consumption of ferrous scrap in 2013 was 18 million metric tons higher than in 2012, with China responsible for 95.8 percent of the additional consumption.

Steel production and therefore raw material consumption were at record rates.  However, market factors quickly turned negative by mid-January this year as political events in Turkey escalated to a level capable of adversely impacting the Turkish economy and steel industry, especially in combination with the already difficult global steel market conditions, which were further exacerbated by high-costs and shortages of energy. Other factors including a rapid drop in iron ore fines prices started to emerge in mid-December, with prices now at their lowest level in six months. This, combined with falling coking coal prices, pushed the estimated cost of blast furnace liquid iron (BFI) in Asia -based on the views of traders- down from around $390/mt in mid-December, with a decrease of $27/mt witnessed up until the beginning of February. Although the yen has recovered a little in recent days, many currencies have weakened against the US dollar, with the yen weakening significantly, and this lowered the cost of Japanese scrap imported in US dollars to levels buyers and sellers were unable to resist. Finally, bulk freight rates in both the Atlantic and Pacific began to decline and have fallen by about 29 percent since mid-December.

2013 reportedly saw the greatest number (27) of steel trade cases filed worldwide since 1999 (34).  Yet, more steelmaking capacity is coming on line or is being planned. It looks like we are moving further into the shakeout required to eventually restore industry health for those that survive. Conditions are unlikely to see a longer-term positive change until excess capacity in steel, mining, scrap processing, and shipping are utilized or rationalized.

Even though expectations for demand are still positive in certain key markets, the recent currency turmoil, especially in Turkey, has created uncertainty and has caused a slowdown in purchasing activity during the last couple of weeks. The situation will become clearer after the Chinese New Year holiday, but demand is very slow for the time being due to the negative developments in emerging markets.

Scrap prices are also on a weakening trend and such pressure does not help long product prices. A large portion of steel producers worldwide are operating with negative cash flow and at the same time have experienced an increase in borrowing costs. The issue of the credit worthiness of steel buyers presents tough decisions for steel suppliers. At the same time, however, competition in the marketplace is still extremely high.

Lower raw material prices are a necessary adjustment in a difficult steel market and are beginning to show results as more steelmakers consider restocking.

Outlook for February

The trade cases in certain countries will have a positive impact on their respective domestic markets. For instance, the demand level for reinforcing bars is still good in the US; however, there are now even more offers chasing the same volume of demand. The antidumping action by US mills against wire rod imports from China constitutes a new battleground and the Chinese wire rod exports will have to find a new home.

In fact, more steel was consumed in 2013 than in 2012. The strengthening of major economies like the US, Japan, UK and the EU should push steel demand up further. That said, some more time may be needed for stabilization.

The Iranian market has so far not lived up to expectations that it would become a driver of demand, but it may still play a big role this year. We may also see some improvements in the Asian market eventually.

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