Steel and the dry bulk market

The rise in demand for finished steel products around the world has been important for the dry bulk sector. A substantial increase in the transportation of steelmaking raw materials has proved positive.

It is interesting to note that the majority of the growth in steel production, in the last decade, took place in countries that have minimal local supply of the main steelmaking raw materials.

Each tonne of molten steel produced via the blastfurnace route requires a supply of approximately 1.6 t of iron ore, 0.9 t of coal plus other minor inputs. The majority of this material (approximately 3 billion tpy) requires transportation via bulk carriers.

China has developed as the major manufacturing base for steel products to meet both its local needs and those for overseas customers around the world seeking low-cost material. As a result, between 2005 and 2015, Chinese imports of iron ore expanded from 275 million t to 953 million t. This equates to a 250% increase over the decade. The majority of the tonnage came from Australia and Brazil.

MEPS analysis of the key regional developments in the global steel scene is set out in the following.

 

China’s steel sector dominates the global industry

 

China has become an increasingly important influence on the global steel market in recent decades. The country’s share of world crude steel production averaged just one eighth of the total in the 1990s, one fifth in 2002, one third in 2006 and almost a half by 2013. China’s growing steel output historically matched its rising domestic demand. However, Chinese consumption peaked in 2013, as reductions were noted in the two subsequent years. This resulted in rapid expansion in exports, as local mills tried to offload surplus supply in foreign markets.

In 2014, Chinese steel exports grew by 51%, on an annual basis, to reach a new all-time high of 93 million t – surpassing the previous record witnessed in 2007. Further expansion occurred in 2015 when exports increased by 20% year-on-year. At almost 112 million t, China’s export tonnage was greater than the total volume produced by Japan, the second largest steel manufacturing country in the world.

This scenario has resulted in the prevalence of antidumping and countervailing suits brought against Chinese suppliers by numerous governments around the world. The strategies previously employed by exporters have damaged the Chinese case for 'market economy status' in the country’s application to the World Trade Organisation. This is perhaps one of the reasons behind the change in pricing policy introduced by Chinese mills in the early part of 2016. The ‘race to the bottom’ seen for much of last year was halted, as exporters looked to secure substantial increases in their selling prices.

The Chinese authorities are attempting to balance a reasonable level of economic growth with accelerating supply-side structural reforms in heavy industrial sectors. However, there seems to be little discernible progress made so far in regard to restructuring the steel sector. The concentration of production by the ten largest domestic steelmakers is only 35% of China’s total output. Furthermore, Chinese steel production was reported at near record highs in March and April 2016.

 

EU steel output down as imports rise

 

Crude steel production in the EU declined in two out of the past three years and a further, albeit modest, reduction is envisaged in 2016. Steel consumption has risen over this time frame, with imports taking a greater share of the local market. The volume of foreign steel expanded by more than 11 million t between 2012 and 2015. Approximately 60% of this growth came from China and Russia. Double-digit percentage, year-on-year, gains continued to be recorded for EU steel imports in 1Q16. A reversal of this uptrend is expected from the second trimester onwards. Price offers from overseas sellers became considerably more expensive in recent months, making them unattractive to buyers in the EU. Furthermore, a number of trade defence investigations are underway, which could curtail imports, somewhat.

However, MEPS believes that despite a likely softening in import volumes in the rest of 2016, import penetration will remain elevated compared with that witnessed in recent years.

 

Changing patterns of trade in Turkey

 

During the past few years, the basic oxygen steelmaking process using iron ore and coal has become increasingly competitive relative to scrap melting. This scenario is apparent in figures for Turkish steel production. Output at scrap-based electric arc mills declined sharply from 29.6 million t in 2012 to 20.5 million t in 2015. During the same period, steel production using the blastfurnace route rose steadily from 9.3 million t to 11 million t.

A similar trend can be seen in the country’s imports of steelmaking raw materials. Turkey, the world’s largest importer of ferrous scrap, brought in 16.2 million t of the material in 2015 – down 28% compared with 2012. Conversely, the inflow of iron ore was up by 28%, reaching 10 million t last year. Indications in the early part of 2016 suggest that the downturn in imports of scrap should cease this year as production at electric arc furnaces stabilises.

Turkey, which was a net steel exporting country for many years, became a net importer in 2015, following a massive 6.4 million t swing in the balance of trade compared with 2014. Last year, overseas sales of all steels declined by 8% due to political instability in the MENA region, trade protection measures and severe competition from key global exporting nations. Meanwhile, imports surged by 38% in the same time frame. Out of the additional 5 million t that Turkey imported in 2015, almost 4 million t was sourced from just two countries: China and Russia. A significant proportion of the total extra tonnage was semi-finished steel. A number of Turkish mills, which operate electric arc furnaces, decided to procure billets and slabs for further processing, rather than buy scrap in order to melt liquid steel.

The outlook for 2016 is for Turkey to remain a net steel importing country. The volume of foreign material is expected to stay elevated and only a slight recovery in export sales is anticipated.

 

US mills attempt to restore market share

 

Apparent steel use in the US jumped 12% year-on-year in 2014. However, domestic crude steel production increased by just 1.5% over the same period, as imports accounted for the majority of growth in demand. High local steel prices, a strengthening US dollar and weak conditions in many parts of the world made the country a magnet for foreign material.

 

Last year, the gain in US steel consumption was eroded as demand dropped back down to the 2013 level. Domestic output fell by more than 10% compared with 2014. Destocking, coupled with the steel price collapse, adversely affected shipments by the local mills. The inflow of foreign steel declined in 2015, but the reduction was not as pronounced as that witnessed in domestic supply. Consequently, overseas mills increased their share of the US market, once again.

US steelmakers faced heightened import competition, while at the same time encountered a deteriorating external environment. Steel exports fell by 16.5% year-on-year in 2015. This was the result of a reduction in demand from the main trading partner, Canada.

Growing calls from the US steel industry resulted in a series of trade-case investigations over the past twelve months. Various antidumping and countervailing duties are being implemented against supplies from a number of countries around the world. The consequences of this legislation are apparent as US steel imports reduced by approximately 35% yearly in 1Q16. The trend of declining steel imports is expected to continue during this year. However, MEPS cautions that the recent rapid steel price increases, implemented by US mills, are in danger of ‘opening the door’ to suppliers not covered in the existing trade cases.

 

Recession curbs steel demand in Brazil, as mills look to export

 

Brazil is currently mired in economic and political difficulties. GDP growth was just 0.1% in 2014. This was followed by a 3.8% decline in 2015 and a similar reduction is anticipated in 2016.

The performance of all the main steel end-user segments, such as construction, automotive and capital goods, is poor. Apparent consumption of finished steel contracted by approximately 8.5% and 17% in each of the last two years. The prospects for 2016 are for yet another substantial decrease.

Brazilian steelmakers are attempting to compensate for declining domestic sales by raising their exports. Overseas shipments expanded, on an annual basis, by 21% in 2014 and 40% in 2015. This upward trend continued in the first four months of 2016 as export tonnages escalated by a further 26% year-on-year. With the recent appreciation of the local currency against the US dollar and high base effects from the elevated volumes recorded in 2H15, a strong level of growth is unlikely during the remainder of the year.

 

India’s growth below expectations

 

India surpassed the US to establish itself as the world’s third largest steel producing nation in 2015. The country aims to top Japan to take the number two spot in the short term but MEPS believes that this goal may not be achievable before the end of this decade.

Domestic steelmakers continue with their ambitious expansion programmes despite the many obstacles related to land acquisition, environmental clearances, access to capital and supply of raw materials. A number of projects have been delayed. Furthermore, low capacity utilisation levels are having a negative impact on profitability. The mills, struggling with large debts incurred in recent years, have requested support from the country’s government and banks to help alleviate their current, severely weak, financial positions.

Indian steel imports increased sharply over the past two years. The influx of foreign material expanded by 26% year-on-year in 2014. The growth rate was even more pronounced in 2015, at 42%. Imports remained high in the early part of 2016 but are expected to reduce significantly in the forthcoming quarters, following the implementation of a range of trade protection measures, including safeguard duties, quality controls and minimum pricing for foreign supply.

 

Dull prospects for East Asian producers

 

The combined steel output of Japan, South Korea and Taiwan is approximately 200 million t, which accounts for around 12% of global production. All three countries use blastfurnaces as their primary means of steelmaking and are major importers of iron ore. Growth in crude steel production stagnated in Japan in recent years but expansion was witnessed in South Korea and Taiwan – mainly because of new investment in blastfurnace capacity. This trend corresponds with that noted in the volume of iron ore entering each country. In 2015, Japanese imports declined by 2%, compared with 2010. In contrast, increases were recorded for South Korea and Taiwan of 30% and 26%, respectively, over the same five year time period.

The medium-term outlook is for steel consumption to grow only marginally in all three countries. Competition is expected to remain fierce in overseas markets, particularly, between these nations and the world’s largest steel exporter, China. As a result, MEPS believes that growth in steel production and, consequently, iron ore imports is forecast to stay lacklustre in Japan. The gains made by South Korea and Taiwan are expected to cease.

 

Conclusion

 

The prospects for significant growth in global demand for steel products are limited in the near term. The potential for any sizeable further, short-term, improvement in demand for iron ore and metallurgical coal is unlikely. Consequently, the opportunities for substantial improvement in activity in the dry bulk sector resulting from the iron and steel industry are quite modest over the next few years.

Author

Jeremy Platt and Peter Fish, MEPS, UK.

This article first appeared in Dry Bulk Autumn. To read this and much more, register to receive a copy here.