***SPOTLIGHT: Stronger and earlier — recovery has arrived, says worldsteel

“The recovery is earlier than forecast and stronger than forecast.”

“The recovery is earlier than forecast and stronger than forecast.”

So said World Steel Association (worldsteel) secretary general Ian Christmas, speaking at a press briefing in London last week soon after the association’s economics committee met in Vienna.

Having contracted by 6.7% in 2009, apparent steel use will increase by 10.7% to 1.24 billion tonnes in 2010, Christmas said, outlining worldsteel’s latest forecast.

“The general picture is an improvement on the forecast we issued in October last year,” said Daniel Novegil, the chairman of worldsteel’s economics committee and ceo of Ternium. “The world steel industry now seems firmly set on a path to recovery.”

State spending has largely been to thank for the recovery, he continued.

“The recovery is not only earlier but also stronger than expected,” Novegil said. “It was driven in large part by government stimulus packages and recent inventory restocking.”

And, as many predicted, it is investment in emerging economies that has lead the way.

“The emerging economies, [which] in total maintained positive growth through the crisis, will continue to show strong growth, driving world steel demand in the future,” he continued.

Chinese apparent steel use posted impressive gains of 24.8% in 2009. But it will continue to grow in 2010, rising 6.7% to 579 million tonnes, according to worldsteel, which also said that the pace of economic growth and steel production growth seen in the first quarter of 2010 suggested that apparent steel use could be even higher than this forecast.

In India, steel demand maintained stale growth during the crisis, posting gains of 7.7% in 2009. Now, worldsteel expects this to grow by a further 13.9% in 2010 and 13.7% in 2011.

Steelmakers are already taking advantage.

Crude steel production in the 66 countries reporting to worldsteel rose 30.6% year-on-year in the first quarter to reach 120 million tonnes, with Japanese output posting the largest gains in percentage terms at 62.8%.

Steel production in North America also rose 53.8%, while EU output was up 37% when the same two periods are compared.

As a result, steelmaking capacity utilisation held relatively steady at 80.2% in March, 15.3 percentage points higher than the same period a year earlier, according to worldsteel’s calculation.

But there is still reason to be wary, Novegil continued.

“The real concern will be how post-crisis macroeconomic policies deal with fiscal rebalancing and inflationary pressures,” he said, adding that “the current recovery in the major developed economies is slower and the projected steel demand for them in 2011 is way below the 2007 level.”

Indeed, apparent steel use in the NAFTA region fell by a whopping 41.6% in 2009. And, even though worldsteel expects this to grow by 26.5% in 2010 and 7.5% in 2011 to 78.1 million tonnes, this will only bring it back to levels last seen in 1991.

Demand in European Union economies fell by less, with apparent steel use sagging 35.2% as Italy and Spain were particularly hard hit by the collapse of their construction sectors. But consumption will only increase by 13.7% in 2010 and 7.9% in 2011 bringing it back to the level of 1997.

And in Japan, where apparent steel use fell by 31.7% in 2009, apparent consumption will grow by 10.3% in 2010 before falling slight in 2011 “due to the weakening of its steel using sectors”. This will bring it back to levels last seen in 1983, worldsteel said.

“This recovery is being driven by stimulus packages and it depends on how long governments continue their stimulus,” Christmas added.
Recovery is one thing, but what does it mean for steelmakers?

Better steel demand does not necessarily mean better prices, particularly in the present environment, where rapid rises in raw materials costs have once again pushed steel prices to very high levels relative to actual end-user demand.

The shift in iron ore pricing from annual settlements to more flexible quarterly pricing and the increases agreed have compounded this problem, worldsteel believes.

“The feeling is that the change to a more volatile environment changes the nature of the market,” Christmas said. “This is a big change.”

And the shift has not necessarily been widely accepted, he continued.

“Is everyone on a three-month pricing model?” he continued. “I don’t know, but I would be doubtful [the change] would be that abrupt.”

Raw materials suppliers will ignore the pressure steelmakers are under at their peril, Christmas said. And, if that pressure is too great, it risks undermining the recovery.

“Most people think that the recovery, particularly in industrialised economies, is very fragile,” he said. “I’m not sure there is a confidence that the industry can pass these prices on.”

“[Even] if those prices are pass on it will have a huge inflationary impact on the economy” he said.