Major Industry Trends
It would be easy to take a quick glance at the figures for global steel production for 2008 and conclude that the sector had come rather well out of the downturn. Total world crude steel production for 2008 reached 1.32 metric million tons, only the second year in history that world production has topped the 1.3 million metric ton mark. True, the volume produced was slightly down on the absolute record year set by 2007, but the decrease was slight, with output falling by just 1.2%, by comparison with 2007.
However, the headline figures hide a massive downturn in the fourth quarter of 2008. According to the World Steel Association (known as worldsteel), whose members produce some 85% of the world’s steel, production declined in nearly all the major steel-producing countries and regions, including the EU, North America, South America, and the CIS in 2008. The one glimmer of light was that Asia in general, and China in particular, maintained positive growth.
Had it not been for the impact of the global slowdown, 2008 would have been an all-time record year. It took poor figures for October and November, and shocking figures for December to cause 2008 to fall behind the record steel production levels set in the previous year. World crude steel output for December 2008 recorded a decrease of 24.3% by comparison with volumes shipped in the same month in 2007.
The poor figures have continued into 2009. According to worldsteel, only China and Iran managed to record positive growth for February 2009. Everywhere else continued to see production declines. Iran recorded an increase of 15.9% in February 2009, producing 0.9 million metric tons of crude steel, and the Middle East is the only region showing production growth for that month.
Worldsteel points out that China’s crude steel production for February 2009 was 40.4 million metric tons, an increase of 4.9% on February 2008. By contrast, Japan produced 5.5 million metric tons of crude steel in February 2009, down 44.2% compared to the same month in 2008. South Korea showed a decrease of 24.8% from February 2008, producing 3.2 million metric tons of crude steel in February 2009.
To put global production figures in context, China is far and away the world’s biggest steel producer. In 2008, it became the first-ever country to produce more than 500 million metric tons in one year, topping 502 million metric tons. However, this was only marginally ahead of its performance for 2007 (2.6%), when China just failed to pass the magic 500 million metric ton barrier. In all, in 2008 China alone produced 38% of the world’s total crude steel.
As a region, Asia tops the world, producing 770 million metric tons in 2008, 58% of the world’s production (an increase of 1.9% on 2007). South Korea and India recorded increases of 3.8% and 3.7%, respectively. Japan, the world’s second-largest steel producer, turned out a little more than a fifth of China’s total production, reaching 118.7 million metric tons in 2008, a decrease of 1.2% on the 2007 figures.
North America (the world’s third-largest producer) saw steeper falls in production, down 5.5% on 2007, with a maximum of 91 million metric tons being produced. Russia (fourth globally) experienced a similar decline to 68.5 million metric tons, while Ukraine (eighth in the world) did even worse, with a decline of 13.1% to 37 million metric tons.
At the same time as production is falling, the capability utilization rate, which measures actual demand for steel on a country-by-country basis, showed even more alarming falls. American Iron & Steel Industries reported that in the week ending March 28, 2009, domestic raw steel production was 1.006 net tons while the capability utilization rate was just 42.1%. By contrast, the capability utilization rate for the industry in 2008 was 89.7%, on a production of 2.14 million net tons. This represents a 53% year-on-year decline, and shows just how severely the recession is now affecting US steel usage. Adjusted year-to-date production to March 28, 2009, was 12.698 million tons, at a capability utilization of just 42.8%. During the same period in 2008, the capability utilization rate was 90.5% on more than twice the tonnage (26.841 million tons).
Turning from the raw production and capability utilization rates, beloved of the sector, to the large production items that demand vast quantities of steel, from tall buildings to automobiles to supertankers, the reason for the fall-off in demand is obvious. All these sectors are in crisis. According to Lloyds List, for example, one-fifth of all new tankers currently under construction will not make it to final delivery—often to the deep relief of the ship owners who had ordered them. Lloyds List quotes a report from the London broker, Simpson Spence & Young, which says that of the 50 vessels currently on order, representing some 56 million deadweight tonnage (DWT), which are due to enter service in 2009, only 45.2 million DWT will actually be delivered.
The problem is that shipyards are struggling to meet delivery deadlines. In the main, the problem lies with yards that have been attracted to the tanker-building market by the high demand of the boom years. In particular, a number of shipyards in China and Korea are at risk. There had been a trend of removing older tankers from the tanker market and converting them to dry bulk carriers, or for use as offshore project vessels. However, that trend, too, has dried up in 2009. “The dry bulk market has collapsed, so why spend US$30 million converting a tanker?” the brokers’ report asks.
Market Analysis
Accountants, PricewaterhouseCoopers (PwC), produce a quarterly report on the global metals sector called “Forging ahead.” While a turbulent period in a sector tends to create weaknesses and distress, which then prompt heightened M&A activity, the steel sector is clearly not yet ready to resume the consolidation activity that characterized 2007 and the first half of 2008. According to PwC, the fourth quarter of 2008 saw continued deterioration for metals companies across the board, as evidenced by plummeting commodity prices.
The key trend among major producers outside China was to look for layoffs, short working, and anything that would enable them to cut costs until the market picks up again. PwC points out that because the first three quarters of 2008 were so profitable for the sector, many companies did not take the downturn as seriously as they should have, and delayed key steps in either slimming down, or in moving ahead rapidly with integration plans if they had just bought another business.
According to PwC, by the end of 2008, only 55% of deals announced during the course of the year had completed. There were 51 deals still pending, and nine had been withdrawn—seven of these in the fourth quarter alone.
PwC points out that two of the steel sector’s key customer segments, automotive and construction, are among those most severely hit by the global recession. “In many cases, end-of-year steel prices were lower than they were at the start of the year,” PwC points out, adding: “All of the 2008 price increases the steel sector enjoyed have been completely eroded.” Not only has demand plummeted, even in regions where there is still some demand, many customers cannot access letters of credit to support their orders, as trade financing is still relatively frozen, PwC says. Many metals CEOs are running their companies in survival mode, with conservation of cash as their top priority.
However, the realities of business mean that steel company CEOs have to position their businesses not just for survival, but to be able to come out of the downturn ahead of their rivals. This means that those with stronger balance sheets are busy constructing possible deals. Some 24% of CEOs in the sector, in a survey carried out by PwC, said they were actively planning a cross-border merger or acquisition over the next 12 months. However, few CEOs thought that an acquisition would do anything for their company’s short-term profitability. There is growing interest, however, in joint ventures and strategic alliances. Because the Chinese market is such a dominant part of the industry, many companies outside Asia are looking for partnering opportunities with Chinese and Asian partners.
PwC says that there are considerable parallels right now between aluminum producers and steel producers. “Major aluminum producers are significantly cutting production and thousands of jobs. Several have announced restructuring plans that include business divestments and asset disposals. Steel companies face analogous concerns, although the challenges are more severe for the integrated producers than for the mini-mill operators,” PwC says.
The mini-mill operators have been benefiting from reductions in the cost of scrap metal (and there are signs that the price of scrap is now increasing again). They are also nimbler when it comes to their ability to produce to demand. PwC points out that the global benchmark hot roll price at December 31, 2008, was down 15% from the start of the year, and down 50% from the peak prices that were achieved in mid-2008.
The US and other governments’ stimulus packages offer hope for the steel sector, insofar as they target infrastructure projects, such as rail and bridge-building, that rely heavily on steel. However, PwC says that industry insiders tend to see this as a buffer, which will cushion some of the impact of the slowdown, while the business cycle runs its course and demand begins to pick up again.
An indication of how quiet the fourth quarter of 2008 was can be seen from the M&A statistics for the whole metal sector. The total deal value for the sector was US$10.3 billion, whereas the figures for the fourth quarter for the last three years are US$186.5 billion, US$298.2 billion and US$77.7 billion, respectively.
Because of its scale, the eyes of the steel sector turn constantly to China, and the health or otherwise of the Chinese economy. One of the crumbs of comfort in the current downturn is that the Chinese economy grew by 9% in 2008, according to SEAISI, the South East Asia Iron and Steel Institute. Although the annual growth rate shrank continuously, from 9.9% in the first quarter to 6.8% in the fourth quarter, at least it stayed solidly in positive territory. It was, however, the first time that China’s growth rate has fallen below a double-digit level since 2003.
That said, there was also plenty of gloom to be derived from the Chinese statistics. According to worldsteel, major steel demand drivers in China shrank significantly in 2008. While investment in real-estate development in urban areas grew by 20.9%—a figure that Western economies would regard as wildly overheated—it was down from the 30.2% growth seen in the sector in 2007. Automobile production grew by 6.5% (again, a figure that US car-makers would die for), but this was down too, from the growth figure of 8.5% achieved in 2007. Air conditioner production growth—a huge demand item in China’s new cities—saw growth slashed from 17% in 2007 to just 4.9% in 2008. According to BHP Billiton, one of the world’s biggest mining companies, China’s destocking cycle is now almost complete, which bodes well for future orders. On the negative side, SEAISI cites the World Bank’s comment that China has, as yet, made little progress in rebalancing its economy towards consumption, and away from its massive overreliance on exports to the developed world. Estimates of China’s growth for 2009 by leading economists range from 5.0% to 8.0%, with Bank of China, Credit Suisse, Merrill Lynch, and Nomura International all forecasting the higher 8.0% figure. Although China’s exports of finished steel products were down sharply in many categories, one area where China has had considerable success is in promoting its export of coated-steel products. This area saw a growth rate in excess of 50% in 2008, compared with 2007.
In mid-January 2009, the China State Council announced a major plan focused on the economic regeneration of the Chinese steel industry, to include favorable tax treatments of some steel products—which is already drawing protests from US and other producers—and the phasing out of obsolete facilities.
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