No end near for steel’s six-year roll
THE world’s steel industry is on a roll, with no end in sight. The industry is in its sixth year of strong growth and the key driver is China. In fact, according to the OECD Steel Committee, China is likely to account for more than one-third of all the steel consumed in the world in 2007. There might be a slight slowdown in the rate of growth in the country’s steel use in 2008 (to about 10 per cent, down from about 13 per cent in 2007), in line with China’s likely overall growth rate, but it is an adjustment rather than a crisis.
China’s own production of steel has continued to expand to the point that Baosteel, the country’s largest iron and steel conglomerate, agreed to a price increase from Australian miners of 9.5 per cent in contract iron ore prices for the 2007 financial year.
Forecasts by the Chinese Iron and Steel Association suggest that steel production in China is likely to increase by about 13 per cent in 2007/08, which suggests that the global market for iron ore will remain strong for the rest of this year and into the next.
Gerard Burg, Minerals and Energy Economist with the National Australia Bank, says earlier this year it was looking as if the iron ore market would slip back into surplus in late 2007, pointing to weaker contract prices. ‘‘ But now that seems less likely. A key factor is that the large number of mining projects under development has meant a shortage of skilled people and heavy equipment, so there have been delays and cost overruns.
‘‘ On the other side of the ledger, China’s demand, especially for the high-quality steel needed for infrastructure projects, remains stronger than anticipated. The general view is that global prices for iron ore and coking coal are likely to remain strong until well into 2008, at least.’’
There is evidence that the Chinese Government is seeking to rein in growth in the country’s steelmaking sector. The Government recently announced policies to close about 35 million tonnes of production capacity, as well as a number of outdated plants, but so far little has happened.
A paradox is that China has, in the past few years, also emerged as a steel exporter, but only of low quality steel. ‘‘ Much of the growth in China’s steel producing industry has been disorganised,’’ Burg says. ‘‘ There are a lot of plants that are not cost-effective, and very polluting. The central government is trying to bring some sort of order to the industry, but its directives are not always carried out at the local level. Beijing has said that it does not really want the country to be a big steel exporter, but the pattern has been that if provincial governments can see the opportunity to make some money through exports they will do so.’’
Despite the importance of China in the global steel outlook, it is not the only game in town. In 2008 the US is likely to add to global steel demand, after several years of working down stocks, especially in its automotive industries. But the key countries to watch are those on development paths.
India, with enormous potential for steel consumption, has already begun to affect the world market. There is large-scale investment in the country’s infrastructure, such as railways, ports, and roads, as well as private sector construction. Demand for steel in Brazil is also looking good, mainly due to the automotive and construction sectors. India and Brazil are both beginning to divert their iron ore production into domestic production and away from exports, which is likely to keep global prices strong.
By the end of the decade, Russia will probably also be a major steel consumer, as its economy continues to grow and much of its ageing infrastructure is refurbished. The country is also gradually modernising its own steelmaking capacity, replacing outdated openhearth plants with electric-arc furnace.
Another region with potential is the Middle East, which has virtually no iron ore of its own and where steel consumption is being driven by massive infrastructure and building activity. The region has no coking coal — companies are exploring the use of natural gas in steelmaking but the idea is embryonic — good news for Australian exporters.
‘‘ Overall, it’s a pretty healthy picture, both for the immediate outlook and for the longer term,’’ says Burg. ‘‘ It’s clear that China is currently the key player, but the long term economic growth potential of China and India, among others, will support demand for steel, and that means demand for Australian iron ore and coal. Steel, after all, is a necessary building block for a developing economy.’’