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Steelmakers in the developed world could use a construction industry rebound to boost demand for their products.

Brian Taylor January 18, 2013

Looking at the recent financial performance of United States-based steel producers, the investment advice website Motley Fool (www.fool.com) comments, “Major U.S. steel companies have had nowhere to hide from the crumbling nonresidential construction market since its peak in July 2008; major domestic [steel] producers have suffered much more than the overall [stock] market.”

The same can be said of steel producers in Europe, where any bounce-back from the global financial crisis of 2008 has been slow to materialize—as slow as the pace of construction of office towers, retail centers and new factories in the developed world.

Those lacklustre steel production numbers of the past five years are not mirrored in much of the developing world, particularly in East and South Asia. In that same time, China has added to its leading position as the world’s largest steel producer, and other nations in Asia have increased their steel output and absorbed larger shares of the world’s iron ore and ferrous scrap.


A Low Gear

To say that steelmaking in the United States is stuck in neutral would not be entirely accurate, according to figures reported to the Brussels-based World Steel Association (WorldSteel).

In the first 11 months of 2012, producers in the U.S. made some 81.4 million short tons (roughly 74 million tonnes) of steel, up more than 3% from the 78.9 million short tons (roughly 72 million tonnes) made in the first 11 months of 2011.

And the 2012 figure is some 10% greater than the 73.8 million short tons (approximately 67 million tonnes) of steel that producers in the U.S. made in the first 11 months of 2010.

However, that level of output growth is not quite the rebound steelmakers have been looking for, particularly if their fortunes are tied to the construction sector. In its essay on U.S.-based steel producers, the Motley Fool notes, “When asked about non-residential construction spending in its [third quarter of] 2012 earnings call [in November], Dan DiMicco, [Nucor Corp.] CEO, said, ‘We are still seeing abysmal levels overall.’”

In Europe, the ongoing parade of government bond and debt bailouts and austerity measures has harmed not only the construction sector but also has eroded purchases in the automotive industry—the other major pillar of steel consumption.


 

Whereas America’s steelmakers have witnessed 10% growth in output since 2010, European steel production has declined sharply in 2012.

WorldSteel figures show output in the 27 EU nations at 157.3 million tonnes in the first 11 months of 2012, down some 4.8% from the 165.4 million tonnes made in the first 11 months of 2011.

Nations most severely troubled by government debt and austerity measures are responsible for a healthy portion of that decrease. Although it is not a major steel producer, production in Greece is down a staggering 35.8% compared with 2011.

The more sizable economy of Spain also is reeling. Using the first 11 months of each of the past three years as a measuring stick, steel production in Spain has dropped from 15.3 million tonnes in 2010 to 14.7 million tonnes in 2011 to 12.7 million tonnes in 2012. Steel production plunged 17% from 2010 to 2012.

In Germany, the EU’s largest steelmaking nation, output has experienced ups and downs during the past two years (2011’s output was higher than 2010’s), but overall production in 2012’s first 11 months of 39.6 million tonnes is down 2.6% from the 40.6 million tonnes produced in the first 11 months of 2010.

ThyssenKrupp AG, one of Germany’s largest steelmakers, is facing financial peril in large part because of ill-timed expansion projects in North and South America.

In December, the company announced a €4.7 billion ($6.2 billion) loss in its 2012 fiscal year. Press reports in Germany are hinting at layoffs among ThyssenKrupp Steel’s 28,000-person workforce in Germany and the potential spin-off and initial public offering of the steel division.

To what extent Europe’s economy can provide good news for European steelmakers in 2013 remains a question. As of mid-December, the European Central Bank (ECB) was predicting 0.3% economic growth for the EU in 2013, with most of this growth coming in the second half of the year.

That modest growth is a revision of an earlier ECB prediction of a 0.9% decline in GDP in 2013. The ECB sees “a recovery of positive growth in 2014, which indicates that we consider that as of 2013 we’re going to see a recovery of the real economy,” ECB Vice President Vitor Constancio said at a December 2012 press conference.


Still Ramping Up?
The growth of China’s steelmaking production has followed a rocket’s path since the mid-1990s, when the nation’s economic reforms and massive infrastructure spending kicked into gear.

In 2012, the nation continued to churn out steel, but not necessarily profits. In terms of output, WorldSteel figures show China producing 660.1 million tonnes in the first 11 months of 2012, up 14.9% from the 574.5 million tonnes made in that same time frame in 2010. (2011 output was 641.4 million tonnes, meaning 2012’s rate of growth was slower than 2011’s.)

While annual Chinese steel production continues to break its own record each year, the over-heated furnaces are not necessarily producing a financial bonanza for Chinese steelmakers.

A report in the Beijing-based China Daily in late November 2012 refers to Chinese steelmakers as “posting whopping losses in the first three quarters” of 2012.

China Daily reports that Liu Zhenjiang, vice president of the China Iron and Steel Association (CISA), speaking at an industry conference in November, said “most large and medium-sized steel companies have [been] suffering losses.” According to the China Daily, Liu said, “The year 2012 is the most difficult year for China’s steel industry since the beginning of the 21st century.”

Data from the CISA show Chinese steel companies posted total losses of ¥5.5 billion (US$874.3 million) from January to September 2012 compared with total profits of ¥38.7 billion during the first nine months of 2011.

At the same conference, Liu referred to “strict control of production capacity” in China in 2013. Liu reportedly urged the country’s steelmakers to upgrade and enhance their market competitiveness and their “capabilities of sustainable development.”

The sustainable development reference could tie into a Chinese central government goal of using more scrap in steel production during the next five-year economic plan. If that is so, steelmakers in China may be incentivised to increase scrap use in 2013.

How much ferrous scrap will be available to Chinese steelmakers points to another question, as scrap generation in other regions is not booming and traditional ferrous scrap importers, such as Turkey, continue to buy heavily. (See “High-Rise Hopes,” p 30.)


Competitive Pressures

Steelmakers throughout the world in 2013 will face regional economic circumstances but also may face a common dilemma in terms of securing ferrous scrap or other feedstock.

Several years of modest manufacturing output and a weak construction sector in both Europe and the United States have resulted in scrap generation rates that are struggling to keep up with global electric arc furnace (EAF) demand for ferrous scrap.

In the U.S., a surge in natural gas production points to the increased use of direct-reduced iron (DRI) or other scrap alternatives in EAF production.

A late December report from the Bloomberg news agency refers to operators of several existing or proposed U.S. steel mills investing to use DRI as feedstock now that natural gas has become abundant and affordable there. The Bloomberg article refers to five such projects:

  • Nucor Corp. has been building a new facility in Louisiana that is designed to churn out DRI. The plant is expected to come online in mid-2013.
  • Nucor may be researching a second DRI project, likely north of Louisiana in a region with abundant natural gas.
  • Voestalpine AG of Austria is considering building a €500 million steel mill in the United States.
  • Australian steelmaker Bluescope Steel Ltd. is reportedly considering building a DRI plant, perhaps near its Delta, Ohio, steel mill, along with a joint venture partner.
  • Bank analysts in late December indicated that Indian steelmaker Essar Global Ltd. is researching the possibility of building a DRI plant in Minnesota in the U.S.

The pricing, supply and demand interplay between DRI and ferrous scrap has shown an established pattern in the United States. Historically, DRI production hits a price floor tied to natural gas costs that renders it competitive for relatively narrow windows of time. However, ferrous scrap prices have sustained themselves at $350 or more per short ton for several years, and seldom has natural gas been as abundant and affordable as it is set to be in 2013. Steelmakers are studying closely to what extent this creates a more open window for DRI use in the United States.

If DRI gains some market share in the United States in 2013, it may be welcome news to ferrous scrap buyers around the world who are eager to bring the scrap overseas.

 

The author is editorial director and associate publisher of the Recycling Today Media Group and can be reached at btaylor@gie.net.

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