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News Release from: Atradius
Edited by the Manufacturingtalk Editorial
Team on 16 January 2006
Is the 'bonanza' in world steel sales
now over?
Although growth is predicted to continue, none of the steelmakers will see such 'good times' in the months and years ahead as they have experienced during 2004-5.
The 'bonanza' in the world steel market seems to have come to an end Will Clark, Atradius' regional director for UK and Ireland, NAFTA and Australasia, warns: "Although growth is predicted to continue, none of the companies will see such good times in the months and years ahead as they have experienced over the past couple of years"
This article was originally published on Manufacturingtalk on 25 Aug 2005 at 8.00am (UK)
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"Suppliers to steelmakers should, in particular, take note of this and ensure their trading conditions are robust." The latest in the Atradius Industry Risk Index series focuses on steel.
This is a major global industry, increasingly dominated by huge multi-national players.
However, Atradius believes that, as with many other global industry sectors, Asia - and China in particular - are starting to set the agenda for the steel industry globally.
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This Steel Industry Risk Index is designed to help steel manufacturers, companies that work with or for the major steelmakers, the major users of steel and also suppliers to steel companies, to come to a better understanding of the industry's key strengths and weaknesses and protect trade accordingly.
2005 was a mixed year for steel.
The preceding two or three years had seen extraordinary growth, based principally on demand from China.
As a result, prices of steel have risen sharply.
During the course of 2005, however, the outlook became less healthy for the established steelmakers, who had grown profits on the back of the rising Chinese demand.
Slackening demand in early 2005 meant steel prices fell around 30%.
The picture going forward though is not quite so gloomy.
Consumption in China has now resumed and the International Iron and Steel Institute predicted, at the end of 2005, that demand for steel would continue to grow but at a much slower rate.
However, the cost of producing steel is still high and producers are working on very tight margins.
Although the cost of key raw materials such as iron ore is unlikely to continue its recent meteoric rises, other factors remain.
The high cost of oil and other energy sources put strain on production costs, as does the cost of shipping raw materials to the factories.
Shipping costs have been steadily increasing due to port congestion, higher trade in steam coal and limited supply of new vessels to carry the goods.
The response to this market volatility from the traditional steel making nations has been to cut output.
In July 2005, JFE, the Japanese steel giant was the fourth major company to announce production cuts.
Prior to this, Mittal Steel, Arcelor and Thyssenkrupp had all announced their own cuts.
All of this means that, at least in the short term, the cost of steel to its users is unlikely to come down.
Atradius is advising those companies that use steel or supply others that do, to keep a watchful eye on their financial strength.
* The China factor - in 2000 China accounted for less than 15% of world steel demand.
It now accounts for around 29% of world demand, according to the International Iron and Steel Institute.
The rapid expansion of internal infrastructure to support China's extraordinary economic growth has fuelled the demand for steel and steel products.
The growth in demand from China has had an impact on the whole industry and its suppliers.
At its peak in 2003/2004, Chinese demands were putting supply squeeze on vital steelmaking raw materials.
China has very little natural resource of its own, so has to import most of what it needs in terms of iron ore, coal, coke and scrap metal.
China's extraordinary growth in demand for steel over the past five years or so has now been matched by its production growth.
It now accounts for nearly a quarter (23%) of world steel production.
This year, the Chinese government has attempted to put the brakes on demand.
It slowed down some major infrastructure programmes in an attempt to stop the wider economy overheating.
However, while demand slowed, production did not stop.
The result was that in 2005, China was forecast to produce around 348 million tonnes of finished steel but had a demand for only 305 million tonnes.
The surplus resulting from this slowing in demand had a very real impact on domestic and global steel prices, sending coil steel prices tumbling from $600 a tonne in March to $440 a tonne in early summer, with Chinese domestic prices being even lower at around $300 a tonne.
Though prices recovered somewhat during the autumn, the abrupt decline showed China's influence on markets.
The oversupply in China may have worrying repercussions for the rest of the steelmaking world if China looks to export its surplus.
Indeed, Chinese steel exports leapt 185% in the first half of 2005 and it is now the third largest exporter behind Japan and Russia.
So, how much of a threat to world steel stability is China's continuing production increase? There is no doubt that China holds a major key to the steel industry's future, but there are factors that should lessen the impact for other steelmakers.
China's steelmaking is still coming principally from smaller manufacturers.
This is against the global trend for mega-mergers.
It is widely accepted that the steel industry will become dominated by a handful of these global giants.
While there is no reason why one of these dominant players should not be Chinese, there is much consolidation to be done in the market before this happens.
China's lack of domestically available raw materials means lower margins for steelmakers.
This, coupled with the 17% tax on exports of high quality steel, makes Chinese steel less competitive on the open global market.
Perhaps the most important factor, however, is that much of the steel produced in China is considered to be of poorer quality than steel produced elsewhere in the world and so may not be as easy to export widely.
Finally, and contrary to fears earlier in 2005, growth in global and Chinese demand is forecast to continue, according to the International Iron and Steel Institute.
The pace of growth will slow to around 7-10% for 2005/2006 from China and around 4-5.5% globally.
* Emerging India - India has been flagged by many commentators as the market to watch over the next 10 years.
It has massive infrastructural projects to undertake if it is to continue its very fast economic growth and continue to attract multi-national companies to its shores.
The real question is, whether it will actually fulfil this potential.
Today, India's steel consumption is still one of the lowest in the world.
The Indian government recently pledged to spend $15 billion on infrastructure projects.
This is expected to send annual consumption rocketing from the current levels of about 36 million tonnes per year.
And while Indian domestic production is set to double in the next five years, it is unlikely that domestic producers will be able to fulfil this kind of demand for steel products - at least in the short term.
In the 1960s and 1970s India and China were producing about the same amount of steel.
China's rapid infrastructure construction programmes of the last 20 years has meant it has leapt ahead.
Looking ahead, could India emerge as the next steel success? India has the very real advantage of vast reserves of good quality iron ore and coal for steel production.
The lack of transport infrastructure means that delay in getting these to the factories, however, does push up costs.
The protectionist policies of the Indian government also make competing globally difficult for Indian companies.
* Outlook - the last few years have seen the steel industry develop into a truly global market.
And while there seems little doubt that Asia and Asian steel companies will play a major role going forward, it is ultimately the global giants that will dominate.
The large number of big mergers and takeovers seen recently looks set to continue.
It is generally accepted that, once all the consolidation has taken place, the industry will be dominated by a handful of these huge players.
It is estimated that total global output will then be around 100 billion tonnes a year.
The consolidation in the industry has meant that the down-turn in prices experienced this year has not hit the major players as hard, although Mittal Steel, the world's largest steel company, reported a fall in operating income of $1,135m between July and September 2005 compared to the same period in 2004.
The real losers will be the smaller companies that cannot cut costs to operate on such low margins as their larger competitors.
These small producers will be squeezed out or taken over.
The Chinese steel producers need to catch up in the consolidation game if they are to compete in the longer term.
However, there is every reason to believe they will do so and that a Chinese steel producer will be among the world's dominant steel companies.
China's current influence over world markets and the potential emerging market in India, however, do pose very real dilemmas for the established steel nations.
Clark of Atradius concludes: "The market consolidation seems set to continue and it is likely to be peripheral suppliers to the steelmakers that will be hardest hit by this; and particularly those supplying the smaller companies, more vulnerable to take-over or even collapse." The short term prospects are best described as cautiously optimistic.
At the International Iron and Steel Institute's annual conference in Seoul, the mood of the members was reasonably buoyant as Chinese consumption has resumed and the demand is predicted to continue to grow, just at a slower pace.
In this environment, it is anticipated that although global steel prices are unlikely to see any significant rises in the short-term, neither are we likely to see any fall in costs or prices.
This, coupled with the high cost of manufacturing steel and the stranglehold the iron ore suppliers have on the market means that all companies in this market will be operating on extremely tight margins.
* About Atradius - Atradius credit insurance not only covers customers for up to 95% of any bad debt, it also carries out initial credit checks on new customers and carries out market intelligence on over 45 million businesses, industry sectors and markets around the world.
It has offices in 40 countries providing local experience and knowledge.
Credit insurance is available and relevant for any size of business, from multi-nationals through to SMEs and start up businesses.
Policies are available to cover trading risks in the UK and internationally.
Atradius also provides debt collection services in the UK and overseas, securing repayment in the most efficient and effective way possible.
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