Conditions Treacherous on Steel’s 'Rutted Road'
Service center executives who feel like they are slowly and carefully picking their way down a severely rutted road can take solace in the knowledge that others are traveling the same treacherous path. Experts gathered in New York at last month’s Steel Success Strategies conference universally reported significant global overproduction, compounded by persistently weak demand, which has led to disappointing prices and stifling competition.
“Because steel is a late-in-cycle industry, it will take at least six months of rising new initiations of capital spending and construction projects before it shows up in steel production and deliveries,” said Peter Marcus, managing partner of World Steel Dynamics, which sponsors the annual event with American Metal Market. Thus, he predicts, the industry can expect another difficult year in 2014.
Because global steel production is so far outpacing demand—estimates range from 200 million to 500 million excess tons—hot-rolled band prices have flattened at a level near the cost of production for most mills. On the world market in May, the average export price of $540 per metric ton was actually less than the median operating cost of $549 per ton. “As steel demand stagnates in most regions of the world in 2013 and 2014, there is an increased likelihood of a poor pricing environment or even a shakeout,” Marcus said. “A pricing death spiral for hot-rolled band on the world market is not as farfetched at it may seem.”
Getting most of the blame for the world’s overcapacity of steel production is China, whose 76 flat-roll mills continue to crank out steel despite the slowing of the Chinese economy. Chinese wide hot-strip capacity rose to about 253 million metric tons in 2012, up 35 percent from 2008. How China’s economy fares going forward will have a direct effect on how much material the country exports, and at what price. Census Bureau data shows that steel exports from China to the U.S. rose 22 percent in the first five months of this year. “The Chinese economy continues it variegated pattern,” said Marcus. “In 2012 it was ‘stop and go,’ while in 2013 it may be ‘go and stop.’” WSD forecasts the world export price for hot-band, which averaged around $540 per metric ton in mid-June, could decline to the $490 to $520 range in the next six months.
For many steel middlemen, such as service centers and traders, profit margins today are also low by historical standards. But looking further down the road, WSD forecasts a number of changes that could improve the profitability of mills and their distributors by 2015. They include: rising fixed asset investment that will bolster demand; the closing of many marginal mills, reducing some of the world’s excess steelmaking capacity; favorable pricing for raw materials such as iron ore and coking coal (though the steel scrap price will remain volatile); and increased actions by mills and their customers to hedge the steel price risk.
All other factors aside, the United States’ economy is still the strongest in the world. Even if the rutted road does not turn to smooth pavement for another year and a half, this is the place to be.