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The near term outlook for world steel markets. Prepared for: ASSOCHAM 4 th India Steel Summit Delhi, August 2010. Prepared by: Paul Scott Group Manager, CRU Steel Group. Presentation plan. Latest developments CRU’s forecast

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the near term outlook for world steel markets

The near term outlook for world steel markets

Prepared for:

ASSOCHAM 4th India Steel Summit

Delhi, August 2010

Prepared by:Paul Scott

Group Manager, CRU Steel Group

presentation plan
Presentation plan
  • Latest developments
  • CRU’s forecast
  • Focus on India and the key challenges faced by its steel industry
  • Key issues facing the world steel industry
slide4
Prices for finished steel, both flat and long products, have generally been following a downward trend during the past two-to-three months

CRU steel price index (CRUspi), index, April 1994 = 100

2007 2008 2009 2010

Data: CRU Analysis.

slide5

And when we take a look at the regional CRUspi indices it’s clear that none of the major steel consuming regions have escaped the weakness

CRU steel price index (CRUspi), index, April 1994 = 100

2007 2008 2009 2010

Data: CRU Analysis.

slide6

Concentrating on demand, world finished steel consumption has weakened of late and for the third quarter as a whole we’re expecting it to fall for the first time in almost two years

World apparent consumption, m tonnes

2007 2008 2009 2010

Data: CRU Analysis.

slide7

And it’s interesting, and perhaps worrying, to note that finished steel consumption is contracting in both developed and developing markets

Quarter-on-quarter changes in apparent consumption of finished steel products, %

2007 2008 2009 2010

Data: CRU Analysis.

slide8

If we look at the reasons behind the slowdown in demand, seasonal factors have played a role in North America, Europe and parts of Asia (especially for flat products)

Typical quarter-on-quarter changes in apparent consumption of finished steel products, %

Data: CRU Analysis.

slide9

In addition, the rebound that had been experienced by some developed economies has proved unsustainable as the positive impact of the inventory cycle has now passed

Stock-to-GDP ratio in the US economy, %

An end to destocking has meant that demand has needed to be satisfied by new production, but further growth requires an improvement in “real” demand or restocking

2007 2008 2009 2010

Data: CRU Analysis.

slide10

Meanwhile, in some developing economies the slowdown in the rate of growth in economic activity has been driven mostly by government policy

Year-on-year changes, %

2007 2008 2009 2010

Data: CRU Analysis.

slide11

Steel mills responded to the growth in finished steel demand during 2009 and H1 2010 by raising output and, while this has since been cut, supply is currently exceeding demand

Crude steel production, m tonnes

2007 2008 2009 2010

Data: CRU Analysis.

slide12
The recent decline in world crude steel production has clearly had a negative impact on the demand for some key steelmaking raw materials

World apparent consumption of key steelmaking raw materials, m tonnes

2007 2008 2009 2010

Data: CRU Analysis. Note: consumption calculated by using 2009 consumption rates.

slide13

And it’s this contraction in demand that has contributed to recent falls in the prices for iron ore, coking coal and scrap, which in some cases have exceeded 30%

Spot prices of key steelmaking raw materials, US$/tonne

2007 2008 2009 2010

Data: CRU Analysis.

slide15

On the face of it, this year looks as if it will be a strong one for finished products demand, as both flat and long products consumption is expected to grow by well over 10%

Year-on-year changes in world apparent consumption, %

Data: CRU Analysis.

slide16

These impressive rates of growth (albeit from a relatively low base) will give rise to new record levels of consumption, for both flat and long products

World apparent consumption, m tonnes

Data: CRU Analysis.

slide17

And it will be non-OECD countries that continue to dominate; their share of world finished steel consumption, which hit 75% in 2009, is expected to remain at around this level

World apparent consumption of finished steel products, m tonnes

Data: CRU Analysis.

slide18

Figures for 2010 as a whole, however, disguise the weakness that we’re anticipating in the second half, when world finished steel consumption is actually expected to fall

World apparent consumption of finished steel products, m tonnes

Forecast

2009 2010

Data: CRU Analysis.

slide19

By varying degrees, seasonal factors; austerity measures; the end to stimulus packages; and, poor sentiment will contribute to this continued malaise in world steel demand

Markit’s Steel PMIs

2007 2008 2009 2010

Data: Markit. Note: readings above 50 signify growth; below 50 signify contraction.

slide20

And even in 2011 we’re not expecting to see a particularly robust set of macroeconomic conditions, with industrial production growth set to slow in most major economies

Year-on-year changes in industrial production, %

Data: CRU Analysis.

slide21

This slowdown in the rate of growth in industrial activity from 2010 to 2011 will likely translate into a slowdown in the rate of growth in finished steel consumption

Year-on-year changes in world apparent consumption, %

Data: CRU Analysis.

slide22

But, let’s not forget that any growth from 2010’s levels will result in new record levels of finished steel consumption (which again will be dominated by non-OCED countries)

World apparent consumption, m tonnes

Data: CRU Analysis.

slide23

And, it’s worth pointing out that from the fourth quarter of this year we’re expecting world finished steel consumption to grow quarter-after-quarter through until the end of 2011

Apparent consumption of finished steel products, m tonnes

Forecast

2009 2010 2011

Data: CRU Analysis.

slide24

So, we see a steady improvement in the demand-side picture for finished products and, given record levels of consumption, we also see support from raw materials prices

Spot prices of key steelmaking raw materials, US$/tonne

2009 2010 2011

Data: CRU Analysis.

slide25

The upshot for finished steel prices is that we believe that we’re pretty much at the low point now and that we should see a gradual recovery over the coming quarters

CRU steel price index (CRUspi), index, April 1994 = 100

Low point about now!

2009 2010 2011

Data: CRU Analysis.

slide26

And while the regional CRUspi indices are likely to show a generally similar trend, note the relative weakness expected in Europe and North America (versus Asia) during H2 2010

CRU steel price index (CRUspi), index, April 1994 = 100

2009 2010 2011

Data: CRU Analysis.

slide28

Supported by a firm outlook for end-use sectors, finished steel consumption in India is forecast to grow at a CAGR of 9.2% between 2009 and 2014, reaching almost 100m tonnes

Apparent consumption in India, m tonnes

  • CAGR 2009-2014:
  • Infrastructure: 10%
  • Real estate: 11%
  • Automotive: 15%
  • Engineering: 8%
  • Consumer durables: 9%

Data: CRU Analysis.

slide29

This growth may well be impressive, but we do have some concerns as to the local steel industry’s ability to satisfy this demand: key challenges faced by the Indian steel industry

  • Delays in acquiring clearance for projects
    • While we appreciate that the consent of all stakeholders is imperative, we fear that it is hindering the development of the steel industry: there is a need for simpler processes.
  • Raw materials availability
    • For iron ore, acquiring project clearance is a concern. For coking coal, however, the issue is that India does not have large reserves of coking quality coal.
  • Infrastructure bottlenecks
    • Bottlenecks exist in power, water, roads and port handling capacity, despite substantial efforts by the government.
  • Labour productivity
    • Although there are exceptions, labour productivity in the Indian steel sector is low.
slide31

Issue 1: The new quarterly pricing mechanism for iron ore looks unsustainable unless steel mills hedge their margin risk; introduce an iron ore surcharge; or reduce the lag

Quarter-on-quarter changes, %

This represents a variation in margin

2007 2008 2009 2010

Data: CRU Analysis.

slide32

Issue 2: We believe that iron ore exports from India have now peaked, but there is a risk that they will fall more sharply, which has upward implications for iron ore prices

Indian exports of iron ore, m tonnes

Data: GTIS, CRU Analysis.

slide33

Issue 3: Chinese net exports of finished steel are expected to increase by 65% between the third quarter of this year and the end of 2011

Chinese net exports of finished steel products, m tonnes

Forecast

2009 2010 2011

Data: CRU Analysis.

please address questions or comments relating to this presentation to
Please address questions or comments relating to this presentation to:
  • Paul ScottManaging Consultant, CRU Steel Team
  • CRU Group31 Mount PleasantLondonWC1X 0AD
  • Tel.: +44 20 7903 2185Fax.: +44 20 7833 5634Email: paul.scott@crugroup.com