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Black and
Blue
(Black
Skies to Blue Skies)
12
Unexpected Steel Industry Events
Our presentation today focuses on the growing
possibility of unexpected steel industry events. In fact, some of
the unexpected events now seem so likely it feels as if they’ve already
occurred. For sure, the incredible collapse of steel demand and prices
outside of China since last summer is wreaking havoc on the
interrelationships in the steel industry
1.
Pig no longer is beautiful.
WSD now
expects no gains in pig iron production outside of China in 2018 versus
the 460 million tonnes produced in 2008. However, there will still be a
good recovery from the 2009 lows, when non-Chinese output will fall to
about 340 million tonnes.
2.
Chinese steel demand after 2009 hits the Great Wall.
Chinese
steel demand on a product basis in 2009 may increase 5-10% to about 480
million tonnes. This level of consumption may be so elevated that
further sizable gains may not occur in the future. The rise of steel
demand in 2009 will be the result of an extraordinary, if not
unprecedented, economic stimulation in the country. China’s fiscal
deficit in 2009 may increase to 4.5-5.0% of GDP versus 0.5% in 2008;
bank loans in the first five months of 2009 are up about 25%
year-to-year; the spending on infrastructure may surge 45% (increasing
from 26% to 40% of total fixed asset investment); and, tax credits and
other consumption incentives have driven automotive sales up to a 11.9
million unit rate (more than the USA at present) – versus output of 9.7
million units last year. In May 2009, the annual rate of car sales was
13 million units.
The
Herculean economic stimuli in 2009, in WSD’s opinion, have a dark side
when it comes to the growth rate for Chinese steel demand in the
future. The ratio of fixed asset investment to GDP and the steel
intensity of the economy may have been pushed to levels that are close
to a peak and, possibly, not even sustainable.
3.
China: Please build those steel plants!
WSD
estimates that the Chinese steel mills’ net export in 2018 may need to
rise to about 100 million tonnes assuming: a) non-Chinese steel demand
from 2008 to 2018 grows 1.7% per year; and b) mounting blast furnace
production restrictions outside of China.
4.
Steel’s Age of Metallics has lost its shine!
WSD’s
analysis indicates that the global obsolete steel scrap requirement in
2018 may decline to less than 80% of the obsolete steel scrap reservoir
that’s on average 10-40 years old, versus about 95% in 2008.
5.
WSD’s World Cost Curve has lost its curves.
As
indicated in the accompanying graphic, the World Cost Curve to produce
hot-rolled band in June 2009 is remarkably flat compared to the
situation last summer when slab, coking coal and iron ore prices were
far higher. In fact, a number of the steel mills located in the fourth
(highest cost) quadrant last summer have now shifted to the second or
even the first quadrant as they are heavy steel scrap or slab
purchasers.
6.
The “economic rent” in iron ore is melting away.
WSD sees
lots of room for iron ore fines prices on the world export market to
decline further in the next few years. The iron ore industry is facing
years of oversupply. Capacity additions remain substantial, and supply
reductions will not be immense unless the price plummets to even lower
levels.
7. The
current HRB price rally on the world export market is only “technical” –
i.e., it won’t be sustained.
8.
High oil prices are good.
WSD
submits that high oil prices, as long as they don’t fuel inflation, are
better than low oil prices from the viewpoint of steel demand and the
overall growth prospects of the global economy. The high oil price
creates an income shift from the Advanced Countries, which have a high
ratio of consumption to GDP, to oil-rich Developing World countries that
have a high ratio of fixed asset investment to GDP.
9.
WSD’s “Black and Blue” scenario is the “most likely” one for the steel
industry in 2009-2010.
In the
Black and Blue Scenario, the steel industry remains in a shake-out
condition well into 2010. Steel demand barely rebounds, although the
global economy bottoms out probably in the summer of 2009, because of
the tie-in to capital spending and construction markets (which remain
highly depressed).
10. A
cataclysmic surge of hot-rolled band prices on the world export market
starting in the second half of 2010.
11.
Blue Skies await those steel mills who survive the battle in the Steel
Cage.
The Blue
Sky world for the steel industry will reflect the massive adjustments
during the Black Skies period. And, because of the enhanced speed at
which the Invisible Hand (price allocates resource) operates, the steel
industry structure will undergo significant changes in just a few
years.
12.
A “safely belt” for the steel price rollercoaster? WSD says “yes.”
In WSD’s
opinion, the safety belt – i.e., the ability to manage the steel price
risk – will consist of four items:
l
The World
Steel Exchange.
l
SteelBenchmarkerTM
l
World
Steel Exchange Marketing (WSEM)
l
A liquid
market in the futures contracts traded on the World Steel
Exchange
Conclusion
The global
economy is likely to be solid after 2010 or 2011.
The steel
industry is in the midst of a huge restructuring that will, over time,
work to the advantage of the strongest companies.
The
Chinese steel industry will continue to play a big role in the evolution
of the steel industry’s industrial structure.
Steel is
in an “Age of Management.”
The steel
industry is now in the process of shifting to a mode we call “realistic
optimism.”
The full report is only available to the paid members of Steelhome,
those unpaid members please buy it from WSD company directly by
bhites@worldsteeldynamics.com |
