Challenging times for steel

CHALLENGING TIMES FOR STEEL The global steel sector continues to be subdued on China and eurozone uncertainties. Vera Blei reports.

The continued uncertainty from the eurozone debt crisis and a sharper than expected slowdown in the Chinese economy are weighing heavily on the global steel sector.

ArcelorMittal, the world’s largest steelmaker by assets, reported a drop in its core earnings of 28.2 per cent in the second quarter of 2012. Market conditions have been “more challenging than we had expected due to a number of factors including the “still unresolved” debt crisis in Europe, its chairman and CEO Lakshmi Mittal said.

Earnings at German steelmaker ThyssenKrupp fell by 30 per cent year-on-year in its fiscal third quarter ending on June 30, 2012, as orders and sales were hit by the weak economic environment, the company said in August. “The weak economic situation, and in particular the general uncertainty resulting from the unresolved sovereign debt crisis, are increasingly affecting our markets,” executive board chairman Dr Heinrich Hiesinger said.

Poor returns in the steel industry are down to a combination of high raw materials prices, volatility and low capacity utilization. Tough environmental regulations are also putting further pressure on European steelmakers. Production costs in Europe are not only higher than those in emerging markets, such as China and India, but also greater than in the CIS and US.

ArcelorMittal announced on October 1 that it would permanently halt hot steel production at its Florange site in France. Instead it is going to shift its focus to finishing. From now onwards, the company said, its focus will lie in “enhancing Florange’s position as a centre of excellence for devel-

oping high-quality value-added products for its customers, most notably in the automotive industry”. Two out of three blast furnaces at the steelworks in eastern France have been idle since July 2011.

Demand in Europe will also be the key factor for Tata Steel when it considers restarting blast furnace No4 at its Port Talbot steelworks in Wales, after the completion of a £185 million rebuild. “The blast furnace will be ready in early December and we will then examine the situation,” said Hans-Ulrich Köhler, managing director and ceo of Tata Steel Europe on October 11. We will take a look at the market, the cost position and efficiency gains,” he added.

New construction orders have fallen sharply in Germany, according to financial information company Markit. German civil and commercial engineering activity declined more strongly in September than it had in August, according to the September purchasing managers index (PMI). However, the overall rate of contraction in the German construction industry slowed. The construction sector is one of the key end users of steel products. The reduced pace of decline in the sector was due to an upturn in homebuilding for the first time in six months, Markit said.

Construction activity and new business in the sector fell in the UK during September, according to the Chartered Institute of Purchasing & Supply (CIPS). “Looking ahead, there is little to be positive about,” CIPS CEO David Noble said. “Homebuilding continues to be hit hard [and] the commercial sector, so long the star of the industry, has lost its sparkle,” he said. “That civil engineering has seen a moderate increase in activity is scant consolation.”

Global outlook

Weakness in the manufacturing sector, the European sovereign debt crisis and the uncertainty on China’s economic performance have had a negative impact on sentiment and as a result momentum in both the developed and emerging parts of the world weakened considerably, the World Steel Association (worldsteel) said at the presentation of its latest short-range outlook for the global steel sector.

Global apparent steel use is expected to increase by 2.1 per cent in 2012 to 1.409 million tonnes. Six months earlier, worldsteel had forecast an increase of 3.6 per cent to 1.422 mt.

For 2013, worldsteel expects modest growth of 3.2 per cent to a record high in world steel demand to 1.455 mt. This is based on an expected gradual improvement in the eurozone debt crisis, restored investor confidence and a governmentinduced soft landing in China.

“We expect China to accelerate based on the government’s fiscal stimulus, but the impact will be less than in 2008/2009,” said chairman of the worldsteel Economics Committee Hans Jürgen Kerkhoff.

China’s purchasing managers’ index for the steel industry rebounded to 43.5 in September, as demand stepped up in the month. The latest reading represents an increase of 3.6 points from August’s 39.9, which was the lowest level since December 2008, according to China Federation of Logistics and Purchasing.

The new orders index for the steel industry also registered an increase of 9.3 points to 41.6 in September after falling for two consecutive months in July and August.

Apparent steel usage in the EU27 is expected to decline by 5.6 per cent this year, with Germany, as the most resilient country, expected to see a decline of 4.7 per cent from 2011’s 39 million tonnes. Despite the overall drop, German steel demand remains above, pre-economic crisis, 2006 levels. “Germany is developing in a more robust way than other developed economies,” said Kerkhoff.

In comparison, steel demand in the USA in 2013, will be 16 per cent below 2006 levels. In Japan, the decline will be 19 per cent, while demand across the EU27 will be down 20 per cent on 2006 levels. Spain

and Italy are the worst affected countries in Europe, with apparent steel usage expected to fall by 11.9 per cent and 12.6 per cent, respectively, this year.

In 2013, the situation is expected to improve and steel demand in the EU27 will recover by 2.4 per cent according to worldsteel’s forecast. “It will take a long time for Europe to deal with the sovereign debt crisis – well beyond the period of worldsteel’s short-range outlook,” Edwin Basson, director general of worldsteel said. “As long as financial markets distrust that governments can service the interest on their debts, we will continue to see doses of negativity being fed into the market.”

Japan’s apparent steel use is projected to increase by 2.2 per cent to 65.5 million tonnes in 2012 aided by the reconstruction activities and government stimulus measures. However, the manufacturing sector is struggling with the strong yen and falling exports, worldsteel said. In 2013 steel demand in Japan is expected to drop 2.9 per cent to 63.6 million tonnes.

“The US perhaps is a bright spot for the steel industry in 2012,” according to Kerkhoff.

He cited the automotive sector, energy infrastructure spending from the shale gas boom and a “timid” recovery in housing construction as the causes of the increases seen thus far this year. US apparent steel demand is on course to reach 100 million tonnes in 2013, as it revised its forecast upward by 0.5 million tonnes from its prior prediction in April. The association also revised its expectations for the country’s 2012 demand growth to 96.5 million tonnes, an increase of 2.3 million tonnes.

Brazilian steelmaker Gerdau is confident that US economic growth and the growth of its manufactuing sector will be sustained in 2013, according to ceo André Gerdau Johannpeter. “It’s not a quarter recovery: You have to look long-term,” he said. He expects the results of the presidential election in November to eliminate some shortterm uncertainty.

As for 2013, there will be continued growth in steel consumption in Asia and the Americas, even if that growth is not as strong as had been expected or hoped, he said. “We’d all like China to grow by double-digit growth again. But if it grows 7 per cent or 8 per cent, it’s still good growth. This is growth. It’s not crisis,” Johannpeter said.

Headwinds

As for Central and South America, worldsteel has also revised downward its forecast for apparent steel for both 2012 and 2013. Most of the countries in these regions had also been facing “headwinds from the poor external economic environment,” worldsteel said.

Finished steel consumption is now expected to reach 47.4 million tonnes this year and 50.4 million tonnes in 2013, down from the association’s April forecast of 49.1 million tonnes and 52.5 million tonnes, respectively. The new forecast represents an increase in consumption of 3.8 per cent in 2012 and 6.3 per cent next year, compared with its previous estimates of 6.8 per cent for 2012 and 6.7 per cent for 2013.

Apart from the poor environment abroad, Central and South American countries have been facing “domestic tightening”, worldsteel said. Alacero, the Latin American steel association, also recently cut its forecast for finished steel consumption in the region because of uncertainties in the global economy.

The recovery of steel demand in the Middle East and North Africa (Mena) has been stifled by the continuing political instability in the region. This, according to Basson, had led his organisation to be less optimistic about growth in the region. However, apparent steel use in the region is expected to increase by 4.9 per cent in 2012 to 62.7 million tones. In 2013, the growth rate is expected to accelerate to 6.7 per cent and steel demand will reach 66.9 million tonnes.

In the long-term the Mena region is set for growth based on growing demand from a young population and urbanisation. This is further supported by stable sources of supply into the region and the availability of financial resources.

“The major question is over political events, such as in Egypt, which can bring recovery and growth to a halt,” Basson said. “Hopefully, the situation will stabilise, [which] would benefit Turkey and Egypt, with a small spin-off into suppliers in Ukraine as well.”

In April, worldsteel forecast a rebound in steel demand in the Mena region by 5.7 per cent following a 2 per cent drop in 2011. At the time it also forecast accelerated growth of 8.4 per cent in 2013 with a projection of apparent steel use of 68.5 million tonnes.

Steelmakers continue to face difficult times that will certainly last well beyond the end of 2012 and 2013. Addressing the underlying structural challenge of global overcapacity will be painful with a limited number of bright spots for the year ahead. n