MEIS 2018: Demand is a key fundamental to the steel market

The growth of demand has been the key factor influencing the positive trend in the global steel market in recent years, Fastmarkets research manager Alistair Ramsay said earlier this month at the 22nd Middle East Iron and Steel Conference in Dubai.

Over the past decade global steel consumption increased by total of 35%, growing by around 3% annually. In 2018, global consumption is expected to rise by 3.9% year on year reaching 1.66 billion tonnes, according to Fastmarkets MB research’s estimates.

This growth is mainly attributed to the rise in demand in Asia. Back in 2008, the Asian market share of global steel consumption was 57% or 704.235 million tonnes but by 2018, the region’s share is expected to surge to 67% or 1.11 billion tonnes.

Inside the Asian region, demand has been on the rise in China since 2016, reaching an average of 15% in 2017. This year, the country continues to stand out at 8.2% growth, contrasting with 1.4% elsewhere in the world.

“As local demand in China goes up, exports go down,” Ramsay said, citing Chinese exports, which have fallen by a further 9% year on year to November 2018, and exporters who have been disinclined to compete, raising prices and dissuading customers overseas.

“So far this year, the average rebar spot price assessed by Fastmarkets MB has risen by between 15-26%. In US dollar terms, this is between $69-143 per metric tonne higher than a year ago,” Ramsay said.

“With flat steel suppliers being more aggressive, hot rolled coil (HRC) spot prices have risen by between 12-35% between January and November this year. In US dollar terms, this is between $68, in both China and the EU, and as much as $237 per tonne in the US,” he added.

What is more important for producers is that their margins continued to grow, especially for backwardly integrated producers.

“Rebar is a fairly fixed addition on top [of billet] of about $50 per tonne, which is perfectly enough to make a profit, but the real profit is coming from selling the billet at a high price to re-rollers in their local markets, ” Ramsay said.

The average spread between billet and raw materials in China was $170 per tonne in 2018 [to November], against $128 per tonne in 2017 and just $26 per tonne in 2016, according to Fastmarkets MB Research data.

Meanwhile, the average spread between billet and rebar in China was $60 per tonne over January -November 2018, against $58 per tonne in 2017 and $44 per tonne in 2016.

A similar trend was witnessed in the markets outside of China. In HRC, in particular, suppliers have been much more aggressive than in the segment of long steel products, notably in the US.

“In April, or slightly earlier, the margin of HRC above scrap exceeded $500 per tonne,” Ramsay said.

“In more recent months, we’ve seen a fairly accurate correction in US steel prices and mills’ margins, but only in those products where they have smashed their customers and they have gone for it,” he added.

Of course one major supportive factor influencing the profitability of US producers was the implementation of protective measures under Section 232, limiting steel imports into the country.

However, initially these measures were intended to help local steel producers increase their market share and more importantly increase production to above 80% - the level that they considered to be sustainable.

“Finished steel imports in the US fell by 12% over the first nine months of 2018 and the latest indications show that the same pattern was maintained through the end of November,” Ramsay said, quoting the US Department of Commerce.

“Since September, we hear that the target utilization rate of 80% has finally been reached in recent months, which is interesting for this time of the year as demand is traditionally seasonally depressed. Therefore, focusing on protection is more fruitful than focusing on cutting capacities,” Ramsay said

“Spot prices are on the rise this year, margins are on the rise this year and the overcapacity issue is as big as it has ever been,” he added.

Ramsay concluded that the major factor influencing price situation in the steel market will remain to be demand.

“In order to find out how steel is going to develop in the future, the key is to look at how the major consuming sectors (construction, mechanical equipment, metal products, automotive and other transport, domestic appliances and electric equipment will be performing,” he said.

“After a predicted rise of 4.7% in 2018, we expect global steel growth will more than halve next year to just 2.3%,” Ramsay concluded, referring to the Steel Weighted Production Index (SWIP), which will slow down from 3.4% this year to 2.8% in 2019.

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