BMI Steel Forecast
| || Spot || Short-term || 2013 || 2014 || 2015 || 2016 || 2017 |
| US$/tonne, average || 703 || - || 710 || 695 || 690 || 685 || 690 |
| Source: BMI, Bloomberg, October 21, 2013. |
| More Pain Ahead |
|MEPS Carbon Steel Product Composite Price (US$/tonne)|
We expect steel prices to head modestly higher in the coming months as demand improves in several key markets. The eurozone economy will gradually emerge from recession in the coming months, while a temporary resolution to the US fiscal impasse means no derailment of the US recovery. Stimulus measures in China will further improve downstream demand, albeit with diminishing efficacy, and lend support to prices over the near term.
We remain bearish steel over the medium term and forecast prices to average US$695/tonne in 2014, compared with our previous projection of US$700/tonne. The outlook in the global steel market remains depressed, with little prospect of brightening in the coming quarters. Crucially, resilient production in China will exacerbate the overcapacity problem gripping the steel industry over the coming quarters. Significant overcapacity and weak margins are unlikely to abate anytime soon and western steelmakers, in particular, will struggle to emerge from the doldrums. Cheap steel exports from China will continue to pressure marginal producers around the world and undermine steel prices on the international stage.
Production: Glut To Persist, Despite China Slowdown
Our downbeat macro view on China will have an outsized impact on the steel industry given China's position as the world's largest steel producer and consumer, at 46% of global consumption in 2012. We expect China's real GDP growth to average 6.1% per annum over our 10-year forecast period, compared with 10.4% in the previous decade.
While Chinese steel production growth is set to contract sharply over the coming years, the global steel sector will remain under pressure from the supply glut in China. We forecast persistent surplus in the steel market, with the global production surplus gradually declining from 100mn tonnes (mnt) in 2013 to 57.4mnt by 2017. The stocks-to-use ratio will increase from 31.3% to 45.4% over the same period.
| Sustained Glut To Limit Gains |
|Global Crude Steel Production Balance And Stocks-To-Use|
Despite the collapse in margins over recent quarters, efforts to rationalise production in China's steel sector will be hindered by concerns over maintaining employment. This situation is similar to, albeit more extreme than in many steel sectors in Europe and North America, where government intervention is circumventing the natural process of consolidation in an oversupplied industry.
Chinese steel mills are expanding production at record rates and defying the broad slowdown in the country's economy. Crude steel output surged 12.9% year-on-year (y-o-y) in August, the fastest pace since November 2012.
| China Charging Ahead |
|Select Countries - Crude Steel Production (% chg y-o-y)|
Surplus Chinese supply will continue to bleed into global markets, as spotlighted by European, Asian and North American markets turning the screw on China over its alleged dumping of cheap steel products abroad ( see 'Steeling Trade: Trade War Prospects & Implications' June 04). On a cumulative basis, Chinese steel exports jumped 17.0% y-o-y between January and August. According to available data from Bloomberg, a growing percentage of domestic output has been diverted to the international market over the past months, from 7.9% in March to 9.3% in August.
| Feeling The Heat From Chinese Exports |
|Steel Exports By Country (% chg y-o-y, LHS) & EBITDA By Steelmaker (%, RHS)|
Outside of China, we expect dominant steel producers such as Japan and the US to witness modest growth in output over our forecast period. Steelmakers in these countries will continue to feel the heat of rising exports from China, and the pick-up in steel demand from an improving economic outlook will fail to provide much respite for the steel industry. Although India is on track to become a steel powerhouse over the long term, steelmakers in the country are struggling with a raft of challenges including a rising import bill and a shortage of iron ore supply.
| Steel Struggling |
|Select Steel Contracts (US$/tonne), Rebased|
The improvement in smelter margins as a result of falling iron ore prices in the coming years will be insufficient to combat the overall weakness in the steel industry ( see Iron Ore To Average US$110/tonne In 2014', September 23). According to Bloomberg, the global steel sector remains locked in significant slack, with the capacity utilisation rate reaching 75% in August.
| Running Below Capacity |
|Steel Capacity Utilisation (%)|
Consumption: No Return To Boom
We expect weak demand to be the key driver of overcapacity and low prices in the coming quarters. The sharp slowdown in Chinese fixed-asset investment will be a heavy burden on the steel industry as excess production from Chinese steel mills becomes increasingly hard to absorb. Indeed, the trend of rising steel exports from China is not sustainable. The proliferation of protectionist threats and anti-dumping investigations by countries from the US to Indonesia in recent months should eventually stem the surge in Chinese steel exports.
| Demand Growth In Structural Decline, Despite Manufacturing Pick-Up |
|Select Countries - Crude Steel Consumption (% chg y-o-y, LHS) & Manufacturing PMI|
Aside from China, other countries in Asia and the European Union will also suffer from lacklustre demand growth for steel products in the coming years. In Japan, automakers have been shifting their production overseas, while domestic shipbuilders are reducing capacity in light of shrinking orders and rising competition from Chinese and Korean shipyards. Similarly, many European markets will see negligible growth in steel demand due to low GDP growth and declining investment in infrastructure. In our view, the structural drivers of steel demand are entering a protracted period of decline in many countries and the recent pick-up in manufacturing activity in the US, Japan and eurozone is not cause for much optimism.
Risks To Price Outlook
The risks to our price outlook are fairly even. In terms of downside risk, the economic recovery in the eurozone is fragile and these countries could slip back into recession over our forecast period. This would further pull down demand for steel products and amplify the glut in the steel industry.
On the upside, demand from China's property sector may prove more resilient that we anticipate and stem the decline in steel prices. The Chinese government could also decide against providing more liquidity to embattled steelmakers in the near future. This would allow a painful unravelling of the steel sector and considerably reduce the amount of steel overhang plaguing the market.
| || 2009 || 2010 || 2011 || 2012 || 2013e || 2014f || 2015f || 2016f || 2017f |
| Price, average || 612 || 733 || 854 || 757 || 710 || 695 || 690 || 685 || 690 |
| Production, mnt || 1,236 || 1,432 || 1,582 || 1,621 || 1,694 || 1,741 || 1,780 || 1,814 || 1,849 |
| Consumption, mnt || 1,220 || 1,400 || 1,485 || 1,529 || 1,593 || 1,644 || 1,692 || 1,742 || 1,792 |
| Inventories, mnt || 177 || 209 || 306 || 398 || 499 || 596 || 684 || 756 || 813 |
| Stocks to use, % || 14.5 || 14.9 || 20.6 || 26.1 || 31.3 || 36.3 || 40.4 || 43.4 || 45.4 |
| Stocks to use, weeks || 7.6 || 7.8 || 10.7 || 13.6 || 16.3 || 18.9 || 21.0 || 22.6 || 23.6 |
| e/f = BMI estimate/forecast. Source: BMI, WSA |