Weakened Steel: Global recession takes toll

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jan 2010

For steel traders, the times are undeniably bad. When asked to describe the market for steel, a Houston steel trader put things this way: “I have just two words: It sucks.”
In New Orleans, Bobby Landry, marketing director at the Port of New Orleans, agreed. “We’ll see a nice piece of cargo go through now and then because of some inventory replacement,” he said, “but we don’t see a continuous stream of cargo.”
As in so many other industrial sectors, China, the world’s largest producer of steel, is an increasingly tempting target for U.S. steelmakers threatened by the downturn. Few were surprised when the U.S. International Trade Commission voted on Dec. 30 to impose duties of between 10.36 percent and 15.78 percent on imports of Chinese steel tubing used mostly in the oil and gas industries. The duties are intended to offset the government subsidies the Chinese government allegedly provides for its steelmakers. The ITC will decide this spring whether to impose additional tariffs of up to 96 percent to penalize Chinese steelmakers for alleged dumping practices.
U.S. steel executives argued at hearings held by the USITC that U.S. steel mills, especially in Ohio and Indiana, have been forced to lay off 2,000 workers over the past year because Chinese government subsidies have enabled that country’s steel mills to profitably ship large quantities of the steel tubing.  
Despite that heated controversy, overall U.S. steel imports remained significantly lower during the last few months of 2009 than during the same period of 2008. Although total U.S. imports of steel rose 28.8 percent in October 2009 when compared to September, October’s totals were 50 percent lower than during the same month in 2008. From January through October 2009, U.S. steel import volumes from worldwide sources were down 51 percent year-over-year. And despite a surge in the tubular-goods-using oil and gas sector, overall U.S. steel imports from China were down 63.8 percent, year-over-year, during the first 10 months of 2009.  
China dominates
China manufactures and consumes between 37 and 40 percent of the world’s steel, making it the world’s largest producer, so trends in China have a huge impact on the rest of the world, said Mark Barrus, Cleveland, Ohio-based partner and global leader in the metals segment at KPMG. China has more than 60 billion tons of iron ore reserves and annual steel production capacity of more than 500 million tons. 
China’s ongoing problems with excess production capacity worsened during the current downturn, said David Ko, partner, Industrial Markets, at KPMG China. Weakening demand for steel from downstream customers who process steel in China began in mid-2008. During 2009, iron and steel consumption forecasts called for only 427 million tons, Ko said. Weak demand from China’s export markets, particularly in such key sectors as automobiles and construction, also took its toll.
Another factor affecting China’s steel exports to the U.S. is the Chinese government’s ongoing initiative to consolidate its fragmented steel sector, Barrus said. Currently, 21 Chinese steel companies produce approximately 5 million tons of China’s annual steel output. According to the China Mining Association, the top 10 Chinese steel companies produced a collective 43 percent of China’s total output in 2008, compared with 37 percent in 2007. That was still too low a figure to please the bureaucrats who supervise the sector in Beijing.
The Chinese government announced in 2007 that it eventually intends to consolidate the industry into just two large Chinese steel corporations capable of competing more effectively in global markets. Barrus said the Chinese government hopes to drive down the number of steel mills in China in order to eliminate excess capacity and create a smaller number of highly efficient steel producers.
What does that mean for the international steel trade? “They want to lower the pressure on Chinese producers to export the steel they produce,” Barrus said. Chinese bureaucrats want the industry to focus on producing steel for its own domestic markets, not on boosting China’s steel exports. Post-consolidation, “a lot of their capacity will be directed toward domestic consumption, not toward exports,” Landry said.
Steel prices stay soft
Despite the Obama administration’s economic stimulus program, U.S. steel prices have yet to return to 2006 and 2007 levels. “The stimulus package has not done much for steel prices,” Barrus said, because few projects in the stimulus program involve the intensive use of steel, and because steel prices are much more affected by demand for consumer goods such as automobiles, durable appliances and non-residential construction — sectors that were not boosted by the stimulus program.
According to the U.S. Bureau of Labor Statistics, prices for finished steel dropped 20 percent in November 2009, year-over-year, although iron and steel scrap prices increased 56 percent over the same period. This could be good news. Barrus said scrap is a leading indicator; steelmakers tend to buy scrap before they buy steel. Both integrated mills and mini-mills use scrap as a key input.
Steel production and consumption track very closely with overall economic output, Barrus said, so whenever overall economic output increases, steel production rises. If the U.S. begins to see GDP growth return to between 2 and 2.5 percent, he said, then we’ll see “across the board increases in manufacturing, so that importing (of steel) will go up despite the weakness of the dollar.” 
Production up, modestly
Now that the global economy is in a phase of modest recovery, steel production and utilization have enjoyed a “modest uptick in the last couple of months,” Barrus said. Other indicators also point upward. On Dec. 15, Fitch Ratings forecast that worldwide demand for steel would experience a mild rebound in the coming 12 to 18 months. But while the industry “should be able to pass along higher raw materials costs,” further price hikes will be “constrained by excess capacity,” Fitch said in the report. 
Steel manufacturers in China, the U.S., and elsewhere are already benefiting from aggressive measures to reduce their costs and shed excess inventory. “Those measures that the producers put in place should pay off as the health of the industry improves and the economy improves,” Barrus said.  The good news for long-suffering steel importers is that “steel will be on the front end of the recovery” when that happens, Barrus said.
Containers competitive
As long as container rates remain low, however, breakbulk carriers may not reap the full benefits of such a recovery. “A lot of stuff that used to be breakbulk now goes in containers,” Landry said, such as paper, metals and steep pipes. “Container rates are low, and carriers are going after commodities” so they can use their excess container capacity. In New Orleans, one of the few recent bright spots for steel is some sizable export shipments, mostly slabs to Asia. “The market turned upside down,” Landry said, “because the U.S. dollar got weak enough for these products to get competitive, and some (foreign) mills reduced their production.” Landry added, “I don’t know if this will be sustainable,” since the increase stemmed from these unusual factors. 
Boosted by the weak dollar, U.S. steel exports to Asia grew 34.4 percent last October compared to September. David Phelps, president of the American Institute for International Steel, said U.S. exports of semi-finished products to China were the key factor in the 107 percent overall increase in exports of steel to China for the month of October. “These slabs exports augmented hot capacity of the Chinese mills and reflect strong economic growth in China,” Phelps said.
Although China’s steel sector is likely to become less dependent on exports, China’s steel production volumes are so large that even in a bad year global steel markets feel the impact when China diverts more of its output to foreign markets, Barrus said. If, for example, China produces 400 million tons of steel a year and exports only 5 percent of that output worldwide, it still amounts to 20 million tons of Chinese steel exports, a sizable output by the standards of most other countries.
Nowadays, trade disputes involving Chinese steel are almost as likely to involve the European Union as the U.S. For example, in late December, China’s Ministry of Commerce said it would impose temporary anti-dumping measures against imports of carbon steel fasteners from the European Union. “Steel protectionism is a fact of life,” Barrus said, not just in the U.S., but elsewhere around the world, even when times are relatively good.   

Source: Break Bulk