Platts Steel Conference: Goldilocks and the one bear

After what was a bearish, miserable 2015 for many steel producers, attendees of the 2016 Platts Steel Markets North America Conference, which took place in mid-March in Chicago, may have been glad to hear one industry analyst predict 2016 will be “a Goldilocks year” for the industry—not too hot and not too cold.

Timna Tanners, a metals and mining equity researcher for Bank of America Merrill Lynch, said the world still has “capacity that needs to exit” in the steel industry, but “the U.S. sheet market seems fairly balanced.”

She showed some of the responses to a recent Merrill Lynch survey of steel producers and traders, with one commenting that “any increase in consumption should make for a fun year.” Tanners remarked that “pricing power tends to kick in” at an above 80 percent mill utilization level, and increased demand for steel could help the industry get there in 2016.

However, it is unclear where that increased demand might come from, with the automotive sector already operating at the peak of its sales range. “How long can auto sales stay at 17.5 million vehicles per year?” she asked.

Regarding China’s recent steel production overcapacity, Terrance Ko of the Hatch Associates office in Beijing said the overcapacity lingers from China’s aggressive stimulus plan created in response to the 2008-2009 global financial crisis.

Several years later, Chinese mills are operating at less than 70 percent capacity but churning out 820 million metric tons of steel annually. China’s apparent steel consumption, however, is falling toward the 500 million metric tons per year range by 2030, said Ko, citing a Chinese trade association forecast.

More encouraging for the scrap market, Ko said forecasts are showing China’s percentage of electric arc furnace (EAF) market share rising from its current 7 percent to as high as 30 percent by 2030.  

China’s overcapacity has not just affected the financial conditions of producers in that nation, said Bill Ferara of the New York office of Standard & Poor’s Ratings Services, but also steelmakers in North America.

The low steel pricing environment “has created very challenging access to capital markets” for the overall metals sector, said Ferara.

He said his ratings agency is aware of “no new issues” of securities within the sector in the past several months. Ferara also said Standard & Poor’s has just one company (Nucor Corporation) with an A or higher rating in the sector, while “the majority” are in the B ratings range and “a few are CCC.”

The 2016 Platts Steel Markets North America Conference took place March 14-15 at the Ritz-Carlton Chicago.