Mergers driving changes
THE Australian steel industry is currently undergoing significant change, making it more efficient and competitive on a global scale. Three steel producing companies will be consolidated into two, with OneSteel acquiring Smorgon Steel and Bluescope acquiring Smorgon’s distribution business.
Meanwhile as China moves up the quality curve, imports are becoming more of a threat. Add to the mix Australia’s Sims Group, the dominant global scrap company, and the sector is certainly interesting.
On an international basis, Australia is not a significant steel producer, representing just 1 per cent of world steel production. However, domestically, metals manufacturing represents around 2 per cent of Australian gross domestic product.
Long and flat products dominate the steel market. While both long and flat products are used in construction, long products are typically more structural in nature ( eg. steel beams) and flat products include roofing, the exterior of a shed, or the outside of a car.
Australia does not export a large number of long products, but imports them to complement the existing range as well as to compete with OneSteel and Smorgon. Approximately 650,000 tonnes — which represents around 20 per cent of the market — of long products were imported into Australia in 2006, and we believe this number is increasing.
Bluescope, the only flat products producer in Australia, exports approximately one- third of its crude production to a variety of regions, mainly the US and Asia. Flat products are also imported ( about 700kt), which compete with Bluescope Steel, representing approximately 20 per cent of market demand.
Globally, the industry is also undergoing significant change as a result of China’s increasing importance and international industry consolidation. Recent examples of market consolidation include Tata’s 4.3b pound takeover of Corus and Mittal’s 26.5b euro acquisition of Arcelor. We believe this trend will continue, and note that Lakshmi Mittal, chairman of Mittal, has highlighted Mittal Steel will continue as an industry consolidator.
More recently, the Chinese Government has enforced changes across the steel industry. Given significant steel production in China, the Government has intervened to try to limit steel production by the smaller, less efficient producers. Initiatives include iron ore import licence restrictions, and the introduction of an export tax on steel. These measures are an attempt to encourage the smaller high cost producers to exit the industry.
Despite these restrictions, production in China is likely to continue to increase a further 10 per cent or 40mt in 2008 ( against 2007). About 34mt of this relates to hot rolled coil ( HRC) production ( or flat products), which represents more than six times the current HRC production in Australia at Bluescope’s Port Kembla steelworks.
However, despite its size, the Chinese steel industry remains fragmented with the top 20 producers representing approximately 50 per cent of production in China in 2006. China’s National Development and Reform Commission ( NDRC) goal is for the top 10 producers to represent about 50 per cent of production by 2010, implying more consolidation is on the horizon. The main issue with consolidation in China currently is the foreign ownership restrictions ( foreigners are limited to a non- controlling 49 per cent stake in any Chinese company).
Further expansion is occurring in China in downstream coated and painted steel products like Colorbond, which are produced by Bluescope Steel around the world ( including China). In 2006, production of metal coated and other coated products increased 44 per cent and 24 per cent, respectively, as China continues to expand. Other major producers of steel globally in order include Japan, the US, Russia and South Korea.
While steel consumption in China of 274kg per capita is significantly below the developed world ( 352kg in countries currently part of the North American Free Trade Agreement and 663kg per capita in Japan), we believe this figure will increase — potentially beyond the current level of NAFTA. India is an outlier with consumption per capita of about 39kg.
We believe world prices will remain robust in 2007. While there may be a seasonal decline in prices coming into the European and US summers, we believe there may be marginal corrections later in the year with overall prices in 2007 higher than 2006. The key risk to this thesis in China is that the current domestic oversupply situation borne out of the changes to export taxes does not worsen and start to impact on global prices. Emily Behncke ( nee Smith) is Vice President, Equities Research Analyst, at Deutsche Bank AG