Inventory drops, industry consolidation, and raw materials price hikes combine for a more positive picture
The United States steel business—and the global industry for that matter—is said to be in crisis. Industry types often like to lay the blame for that state of affairs on the Chinese.
Earlier this year, Rob Roberson, director of corporate logistics for the steel maker Nucor Corporation, told a U.S. Senate committee that “a glut of global steel production has led to the dumping of steel into the U.S. market at historic levels and in violation of international trade rules.”
This has happened despite the highest level of domestic steel consumption since 2006. “Due to unfairly traded imports,” Roberson continued, “the American steel industry’s capacity utilization in 2015 was less than 70% and pricing for most steel products collapsed.”
Brighter Future for Steel?
But at least one steel trader with operations in Hong Kong says that situation is turning around. Herrick Lau, CEO of Crownia Holdings, told the AJOT, in an exclusive interview, that the confluence of three circumstances could make for a brighter picture.
The negative steel scenario was outlined in a recently-released report from the global credit insurer Coface. According to the report, the global steel industry is suffering from weak growth, fed by overcapacity and Chinese exports.
This follows a long period of increasing demand driven by China in the 2000s. But the Chinese economy has slowed in the last couple of years and its appetite for steel has waned: 2015 saw a five-percent reduction in its consumption. Even as global production weakened, supply was still abundant. China took to now exporting its production surplus, and which weakened steel production structures in Europe, the United States, and emerging countries.
But Lau says that this scenario is getting played out, leading to higher global steel demand and better prices and margins for steel producers. In fact, he suggests China’s drawdown of its excess inventory was a necessary precedent for improvement in the global steel picture.
“The Chinese government has been focused on trimming excess inventory for the last year to 18 months,” said Lau. “That is why you are seeing Chinese manufacturers selling their products at big discounts. The whole thing was to reduce excess inventory and we are coming to the point now where inventory levels are becoming more reasonable.”
Restructuring of China Steel Industry
Crownia Holdings, headquartered in Vancouver and with operations based in Hong Kong, buys specialty steel products—such as cold rolled and hot rolled steel, bearings, tubes, springs, cable, and stainless steel—from manufacturers, mainly Chinese, and sells those to customers outside of China. End users for these products include shipbuilders, automakers, and oil industry equipment manufacturers. Besides the fire-sale discounts—some call that dumping—which are decreasing excess Chinese inventory, Lau sees a restructuring of the Chinese steel industry as another cause for optimism. As one example, the Chinese government has arranged for the merger of two of the largest steel manufacturers in the country. Wuhan Steel, from the city of the same name, 500 miles west of Shanghai, will be combined with Baoshan Iron and Steel (a.k.a. Baosteel) of Shanghai.
“This merger will create a situation where they’re going to lay off up to 25% of the labor force of the combined company,” said Lau, “and reduce the production capacity in the coming 12 to 18 months by around 20%.”
Both of these developments, the trimming of excess inventory and the consolidation of capacity, will lead to a greater balance of supply and demand within the next year and a half, according to Lau. That assessment jibes with the Coface report, which concluded that a supply-and-demand rebalancing could be possible beginning in 2018, when capacity reductions in China will begin to be felt.
Raw Material Prices Increasing
And there is yet a third circumstance Lau cites for his cautiously rosy description of the future of global steel. “Prices for raw material for steel are all coming up,” he said. Commodity prices for cobalt, tin, zinc, nickel, manganese, and iron ore have all trended upward over the last year.
Raw materials price increases often leads to increased demand for recycled steel, but not in the markets in which Crownia Holdings operates. “We don’t trade recycled steel or scrap,” he said. “Our customers in the Middle East oil industry don’t use recycled steel. The car manufacturing industry and the medical sector also don’t prefer to use recycled steel.” That said, the demand for recycled steel is also on its way up, Lau noted.
On the demand side, increases in oil prices are expected to attract more oil exploration activity and, with that, increased demand for steel. South Asian economies such as India and Bangladesh are growing their shipbuilding industries with the help of their respective governments. There are also signs of increased domestic demand in China.
“Put all of these things together and it all points to one thing,” Lau said. “The steel market is improving.”
A recent report from Worldsteel appears to corroborate Lau’s contentions. Worldsteel’s projections show a slowing in the contraction of demand in China and modest growth in steel demand globally through 2017. (See box on page 4)
Given all of these economic factors, one wonders how the issue of Chinese steel has migrated into western political discourse. Besides some of the sharp rhetoric seen in the recent U.S. presidential campaign, the European Union has also been active on this front. The EU recently established an EU-China discussion platform on steel overcapacity as part of its bilaterial relations with China.
Lau’s take is that these are mainly public relations efforts that will have little impact on Chinese steel policy. His evidence: In 2015, Chinese steel exports to the EU account for seven percent of total steel exports from China. Exports to the U.S. amounted to 2.2 percent of the total. Compare those figures to China’s larger customers: 30% of exports went to Southeast Asia, 10% to the Middle East, and 12% to Korea.
“My gut feeling is that the Chinese government will continue on its current course,” said Lau. “All of this political talk won’t have an impact on the Chinese steel market.”