Steel: Driving Forces & Challenges
BMI View: The global steel industry will continue to suffer as a result of significant overcapacity in China, as cheap exports from the country will remain a key drag on global steel prices over the medium term. While steelmakers in countries such as the US, Turkey and India are set for improving fortunes, the sustainability of high-cost producers in these and other countries remains vulnerable to both domestic and external headwinds. In many cases, the improvement of smelter margins as a result of falling input prices will provide only limited respite due to persistently low output prices.
Despite improving demand and the removal of some older steelmaking capacity in 2013, we believe the steel sector will remain gripped by persistent challenges over the coming quarters. Steelmaker margins in many countries will stay wafer-thin as sales remain pressurised by sluggish demand growth in domestic consumption and cheap Chinese supply in the seaborne market. Indeed, significant overcapacity in China's bloated steel sector will be hard to digest in some countries as efforts to rationalise production run into political headwinds.
Furthermore, several downside risks will continue to linger and challenge the sustainability of high-cost producers. We believe the improvement of smelter margins as a result of falling iron ore prices and subdued prices for coking coal, will be insufficient to combat the overall weakness in the steel industry.
|China's Outsized Dominance|
|Global Steel - Production (LHS) & Consumption (RHS), 2012|