The GFMS Steel Group notes that “steel prices in 2009 have mirrored the global economic performance, with prices hitting lows in early second quarter Q2, before recovering through Q3. Asian prices were the first to move upwards, driven by the early adoption of the Chinese stimulus and credit expansion.” But GFMS fears for the future, and the second half of 2010 in particular.

In China, the increase in credit availability drove demand for steel-intensive consumer goods such as cars and white goods, while also being invested into private sector construction. The stimulus funds also went into construction, and around 65% of steel consumption within China is used in construction applications. Steel output in China in Q3 was running at an annualised output rate of close to 600 Mt, and China is likely to produce almost 50% of global steel this year, compared to less than 10% of global GDP – a clear mismatch that cannot be sustained indefinitely.

A stimulus by its definition is a oneoff event and GFMS is concerned that “when this is withdrawn, the excess steel capacity will initially flood other markets, but may also set the scene for an extended period of low margins and poor profitability for steel mills as the Chinese 15-year boom in capital investment ends. The end of the post-war North American and European investment cycle in the mid 1970s resulted in 30 years of restructuring, capital destruction and huge losses in their respective steel industries.

“The impact of low capacity utilisation on steel industry margins has already been seen in 2009. As a result of inventory accumulation at the end of 2008, when the steel industry was slow to recognise the economic slowdown, output was cut dramatically in the first half of 2009, and GFMS estimates that global crude steel utilisation rates dropped to 60%, and this was even lower in mature economies. Even as output has bounced back to 75-80% levels, producers lack pricing power as any improvement in demand is met by producers eager to gain market share and willing to price at marginal cost if necessary. Nowhere is this clearer than in long products, where Turkish rebar producers have been unable to claw back margins to previous levels as they struggle to sell into Middle East and North African markets, where demand is running significantly below last year levels.

“With global demand set to remain below peak levels through 2010, pricing and margins are unlikely to return to peak levels. However, as the global economic performance improves through the first half of 2010, steel demand is expected to grow. As mills secure additional ferrous scrap and other raw materials, we expect steel prices to go up in line as conversion costs are already at marginal levels. In addition, inventory cuts through 2009 have left steel stocks in mature economies at low levels and this will require additional purchasing by distributors that will boost apparent consumption and help to push prices up further through the first half of 2010.

“However, we are forecasting that the global economy will only exit the recession slowly, while capital-intensive (and steel-intensive) construction demand will lag. The industry therefore runs the serious risk of excess supply and price weakness by the second half of the year – a trend that may be compounded by the beginnings of the withdrawal of Chinese stimulus.”

In 2008, more than 1,300 Mt of steel were manufactured (worth well over $1 trillion. Steel is a basic material present in virtually all industrial processes and construction applications and is the most ubiquitous commodity market of all. Yet it remains relatively opaque. For details on GFMS steel reports, contact [email protected]