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Steel Change may be ahead by Tim Alch May 16 2008
Steel Change may be ahead by Tim Alch May 16 2008
Steel Change may be ahead by Tim Alch May 16 2008
Steel Change may be ahead by Tim Alch May 16 2008
Steel Change may be ahead by Tim Alch May 16 2008
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Steel Change may be ahead by Tim Alch May 16 2008

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In the first three months of 2008, global crude steel output …

In the first three months of 2008, global crude steel output
rose by 5.6% year-on-year. With a cautionary tone, Tim Alch
explains why this may be a year of transition for the global
steel industry

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  • 1. FOCUS STEEL PRODUCTION GROWTH Without including China in the global crude steel production figure, world output rose by 3.3% (7.5% including China) in 2007. This reflects China’s size and fast rate of growth with its production of steel in 2007 rising by 15.7% over the prior year, the slowest rate of growth since 2002 and slower than the 18.8% increase achieved in 2006. Elsewhere around the world, US steel makers produced 1.4% less steel than in 2006 due to weaker markets and supply interruptions. Meanwhile, crude steel output in Europe rose by 2.2% while Brazil and India, for example, increased steel output by 9.3% and 7.3%, respectively. Russia in 2007 increased steel output In the first three months of 2008, global crude steel output by 2%. (See table p18.) The developing BRIC nations (Brazil, Russia, India rose by 5.6% year-on-year. With a cautionary tone, Tim Alch and China) have been transforming the structure of explains why this may be a year of transition for the global the world’s steel industry. Their share of global crude steel production rose from 31% of the world’s output steel industry of 850Mt in 2001 to almost half of the total production of steel in the first quarter of 2008, up from the 48.2% share of 1,344Mt of steel that was produced in 2007. AST year was another record-setting one as difficult to estimate, it is also difficult to anticipate what China has increased its share of the world output from global crude steel production rose 7.5% above the impact may be on steel demand, steel prices and 6% in 1985 and 15.7% in 2001 to a remarkable 36.4% the levels of 2006, albeit at a slower rate of producers’ margins. Adding to the uncertainty is that in 2007. growth than the 9% increase in 2006. In some China is now the world’s largest steel producer, instances steel prices have doubled during having increased its annual production by about MERGER AND ACQUISITION FLURRY the past year, adding to the concerns in the broader 338Mt since 2001. Elsewhere in the business, 2007 saw a continuation of economy about higher inflationary expectations. Last year was the fifth consecutive year when global further consolidation in the number of players in steel While high steel prices cushion the impact of higher crude steel production rose by more than 7%. This pace production and related services, ranging from the small raw material costs, the latter are a departure from the of growth is faster than in any of the past five decades: to very large firms. Importantly, a number of these recent past, and bear noting as policy maker prescrip- average annual global crude steel output rose by 5.3% transactions have concentrated the production of vari- tions may have unwanted and unintended consequenc- in the 1950s; 5.8% in the 1960s; 2.6% in the 1970s; ous key steel products, generally bolstering the pricing es. Meanwhile, growth forecasts are being cut, marking 1% in the 1980s and 0.3% in the 1990s. power of steel producers. another notable departure from the robust growth Thus, the steel industry since the last prolonged India and Brazil in recent years have been at the trend in many of the world’s advanced and developing slowdown in the second half of 2001 has been very centre of a number of these deals and appear to be economies since 2002. strong, with about two-thirds of the world’s real where further expansion is likely. Notably, Mittal Steel Based on past history, flat economic growth in the economic growth happening in developing world acquired Arcelor to make the world’s largest, global US and Europe is not a positive indicator for the steel economies. Most of the new steel-making capacity built steel company while Tata Steel acquired Corus Steel and industry. While the length and severity of the economic and incremental steel consumption in recent years has then Jaguar motors. Both steel companies are powerful slowdown in the US and Europe in 2008 and 2009 are also been in the developing world. and dynamic enterprises with impressive resources and talents. In addition to these giant deals from Indian A Ukrainian steelworker works near open-hearth furnaces companies, steel makers from Brazil and Russia have at the ZaporozhStal steelworks in Zaporozh, Ukraine been busy acquiring steel-related assets in the US, Photo: Dmitry Beliakov/Bloomberg News Canada and elsewhere. 16 Mining Journal London, May 16, 200816-20MJ080516.indd 16 15/5/08 10:47:58
  • 2. Nevertheless, the steel business continues to be a likely outperform most very fragmented, competitive industry with many more regions. producers than the mining sector, where the three According to the biggest players mine two-thirds of the world’s seaborne IMF’s estimates, trade of iron ore. China’s economy During the past 30 years, the mining industry has will grow by 9.3% undergone a radical period of consolidation, reducing in 2008 and 9.5% in the number of iron-ore and coal producers, for example, 2009. Notably, in the to a concentrated few. Furthermore, low commodities first quarter of 2008, prices in the 1990s and much of the 1980s did not spur China’s GDP rose by much reinvestment or expansion of capacity, leading to 10.6% above year- current tight supplies. ago levels, albeit at a slower pace than the ECONOMIC WARNINGS 11.2% rate in the final As has become apparent to most observers since about quarter of 2007. mid-2007, a number of issues are beginning to cloud For the world, the IMF the near-term outlook for the steel industry. forecast 3.7% growth in Again, these signs mark another departure from 2008 and a modestly faster the relatively robust and steady growth of the past rate in 2009 of 3.8%. This is seven years. in the wake of growth of 4.9% Among the issues of concern are: the revaluation in 2007, 5.4% in 2006 and 4.8% in Photo: StockXchange and retrenchment of credit, which is still unwinding 2005. and apparently neither limited to subprime mortgages Nevertheless, steel producers and suppliers should investments and grown the manufacturing base and nor the US; the health of the US economy, which is review current and long-term plans. The duration and infrastructure of developing nations, in particular those being impacted on by the nation’s banking and severity of the US slowdown and impact on the steel of the BRIC group. finance systems’ efforts to revalue risk and a weaker industry may not be known today and issues concern- Another important factor in the growth of developing housing market; the value of the US dollar and other ing monetary and economic policy makers and leaders economies has been the expansion of the world’s capital currencies that are increasingly more volatile, add to uncertainty and risk. markets. As such, increased flow of capital in the devel- as have been the equity and financial markets Steel demand is currently robust, though slowing oping world has fuelled rapid economic expansion. in general; and soaring food, energy and metals economic growth in the US and Europe may quickly Major capital investment in local infrastructure prices. impact on steel makers’ profits and order books, in spite underwritten by local authorities or foreign investors Higher commodity prices and raw material costs of recent reports that orders for construction, machin- has led to local steel consumption keeping pace with are troubling as they reflect (in general) very strong ery, transportation and oil and gas industry products higher levels of production. The growth of a burgeon- demand that is outpacing relatively tight supplies and are strong. ing middle class in China, India and the Middle East low inventories. Evaluating the sustainability of growth in the has all contributed to a strong demand for steel, with In the BRIC and oil-exporting nations, the Interna- developing nations is important, although in its favour analysts forecasting that China’s car industry will soon tional Monetary Fund has lowered growth forecast to the steel, mining and metals industry in recent years has be the world’s largest. between 4% and 10% in 2008 and 2009. reported record profits. In addition to these structural and economic policy While these regions are also forecast to have a changes, much of the world’s new steel-making capacity slower pace of growth than in recent years, the IMF’s RECENT STRUCTURAL CHANGES has been built in the developing world. The combined view is that developing nations’ economies, in general, During the past seven years, skilled management shares of crude steel produced in the BRIC nations as are likely to sustain growth, while the Middle East will by policy makers and industry leaders has fuelled Continued on page 18 CHINA: A DELICATE BALANCE Net steel exports from China need to be carefully been geared too heavily on heavy and export-led begin exporting oil again, for example, energy monitored. The country switched from being a net industry. prices could return to the norm. importer of steel in 2004 to being a net exporter Having said that, China does appear to have a In the interim, watching for change in China’s in 2005. New exports of steel from China in 2007 long growth path ahead as there are about 160 fixed-asset investments and its steel exports will be reached an all-time high of about 52Mt (10% of cities with populations larger than 1M people, com- important indicators for the global steel industry. production); any more could tip the industry’s pared with only nine such cities in the US. Moreover, As the year progresses, the steel industry may crank delicate balance. to date its leadership has deftly handled its growth, back up, or else the world’s economic engines As yet there are no clear signs that China’s recent and accumulated a healthy cushion in the form of may take an extended breather. In the latter case, economic growth will be derailed but signs of reserve surpluses. suppliers beware. change will need to be monitored between now Steel is a cyclical business, as are the metals and and the end of 2009 as there are an innumerable mining industries. Whether the policy makers in Steel reinforcing rods on a Shanghai construction site number of variables that suggest this period may be the US, Europe, and China will be able to sustain Photo: Kevin Lee/Bloomberg News different from the recent past in the steel industry. economic growth will be an impor- If the world’s economies do slow in the remain- tant factor influencing whether the der of 2008 and 2009, and/or the US slips into a steel industry will continue to enjoy full-blown recession, steel demand will fall from continued robust growth in 2009. current levels and steel customers are likely to resist While China today is the major fac- steelmakers passing on the higher costs for metals tor in the global steel business, there and energy. Until these issues are sorted out, most are a number of ‘wild cards’ to look steelmakers that buy iron ore, coking coal and for that may hurt or improve the steel molybdenum on a spot market basis and rely on industry, including continued higher annual coking-coal and iron-ore contracts are likely energy and transportation costs, the to see profits decline. impact of legislative efforts to limit Another issue is whether China’s economic greenhouse gas emissions and/or growth and growing steel consumption and indus- trade-related legislative efforts, as try will be sustainable. The issues (pollution, rising well as the severity and duration of costs of energy, efforts to limit growth through the downturn of the US economy. various restrictive policies) bring into question On the plus side, should the situa- whether the future course and growth of China has tion in Iraq improve and that country www.mining-journal.com London, May 16, 2008 Mining Journal 1716-20MJ080516.indd 17 15/5/08 10:48:00
  • 3. FOCUS Continued from page 17 LARGEST CRUDE STEEL PRODUCING COUNTRIES a percent of the world’s output rose from 31% in 2001 2006 2007 1Q 2008 2007/2006 2007/2001 Share 2001 Share 2007 1Q08/1Q07 to 48.2% in 2007. In this period, global crude steel (Mt) (Mt) (Mt) (%) (%) (%) (%) (%) production rose from 850Mt in 2001 to 1,343Mt in 2007 1. China 423.0 489.2 124.9 15.7 224 17.7 36.4 8.6 – a 58% increase in seven years – while China’s crude 2. Japan 116.2 120.2 38.4 3.4 17 12.1 8.9 4.4 steel production rose from 151Mt to 489Mt. 3. US 98.6 97.2 25.4 -1.4 8 10.6 7.2 7.9 An important factor supporting the steel industry 4. Russia 70.8 72.2 19.2 2.0 22 6.9 5.4 5.0 is greatly expanded inter-regional steel trade in Asia- 5. India 49.5 53.1 14.3 7.3 95 3.2 4.0 6.1 Pacific, parts of the Americas, Africa and the Middle 6. South Korea 48.5 51.4 13.2 6.0 17 5.2 3.8 5.0 East (as the developing nations and China continue to 7. Germany 47.2 48.5 12.1 2.8 8 5.3 3.6 -2.1 expand ties with the advanced economies of the world). 8. Ukraine 40.9 42.8 11.0 4.7 29 3.9 3.2 3.6 China continues to expand trade with its largest trading 9. Brazil 30.9 33.8 8.6 9.3 27 3.1 2.5 8.1 partners, led by the US and including Hong Kong, 10. Italy 31.6 32.0 8.3 1.2 21 3.1 2.4 -0.7 Japan, South Korea, Germany and Taiwan. Share Total 71.1 77.4 5.6 The Middle East in particular in recent years has Global Total 1,250.7 1,343.5 340.7 7.5 58 100 100 340.7 vastly expanded the scope of its economic activities BRIC TOTAL 574.2 648.3 167.0 12.9 146 31.0 48.2 49.0 Source: International Iron and Steel Institute, Brussels. and construction and development plans as part of a Figures may not add up due to rounding. greater plan of raising the standards of living by broad- ening its economic base from energy. Steel imports in more than 90% of iron-ore demand since 2001. the Middle East in 2007 rose by about 35%, equal to As such, China and the developing nations are about 35Mt of steel. consuming greater volumes of steel and steel-making raw materials and energy. As has occurred in the GROWTH IS OUTPACING SUPPLY mining industry, the expansion of various key The size and growth of China’s steel industry is impres- parts of the global energy industry has sive and continues to amaze most observers. In 2007, trailed global demand for fossil fuels, China’s steel industry produced 489.2Mt of crude contributed to higher steel, equal to over 36% of the world’s total output of energy costs. 1,343Mt. Thus, China last year produced more than four Consequently, high com- times the 116Mt of crude steel produced by Arcelor modity prices have boosted Mittal, the world’s largest steel company, and the the fortunes of Russia, Brazil 120Mt of steel produced in Japan, the second-largest and the Middle East, which steel producing country. are forecast to continue The economic growth of China is distinguishable growing at above- from that of most other developing nations as its econ- average rates of growth. omy has grown at double-digit rates in each of the past The higher cost of energy five years. Since 2001, China’s steel making capacity and is not a positive development crude steel output has increased by more than 338Mt, for the steel industry or global an amount almost three and a half times the 97Mt of economic growth. While some of crude steel produced by the US steel industry in 2007. the recent surge in oil (and metals) To achieve this feat, hundreds of billions of dollars prices is attributable to investors speculat- have been invested in China’s steel industry. A much ing and seeking to hedge the impact of a declining US However, China’s leaders, policy makers and business greater sum of money has been fed into various fixed- dollar, the recent spike in prices is another departure leaders are not alone asset investments in its public and private infrastruc- from recent years past when energy prices were more as they struggle to meet this challenge. Recent reports ture, manufacturing base, services and equipment or less stable. of higher inflation in the US, Europe, Russia, the related to the electrical, utility, transportation and Middle East, India and Brazil are common and infrastructure sectors. STRATEGIC REVIEW entering into the psychology of business people and The impact of China’s greater steel production has High prices are a major departure from the recent past consumers. reached far beyond its borders on many mining and which has seen a period of relatively benign inflation. In the interim, resource-producing nations such as metals projects under development around the world, Given the importance and difficulty of reigning in infla- Brazil, Russia and the Middle East will likely continue to affecting the price and availability of many key raw ma- tionary expectations, this is an issue that may impact on profit from tight supply conditions in the metals and oil terials that are at near record price levels today. China’s the steel industry, depending on the success and nature markets, as will various privately- and state-owned min- steel industry has accounted for of various policy makers’ prescriptions. ing, metals and oil and gas enterprises. Furthermore, as about two-thirds of the an- While China’s recent trade surplus and currency re- a result of their first hand knowledge, these and various nual growth of global serves continue to grow, it is experiencing much higher other private and quasi governmental interests, such as steel produc- inflation: its consumer price index rose above sovereign wealth funds (SWFs), are now investing large tion and 8% in April 2008, having steadily increased from less sums of capital in the resource sector. than 3% one year ago. As a result, China’s policy makers The latter source of capital is considerable. China, and industry leaders are facing challenges and obsta- Japan and Russia have very large foreign reserve sur- cles of their own. pluses valued in excess of several trillion dollars which, In an effort to slow the growth of its economy like SWFs, are expanding investment activities in the and control inflation, China’s leaders have resource sectors and elsewhere. sought to limit steel and other exports by As the commodities markets continue to boom, instituting restrictive policies. While these large capital investments are being made to build and efforts go well beyond the steel industry, expand railroads, port facilities and other related infra- the higher costs of metals, energy, labour structure. Therefore the mining and metals processing and transportation in China is not only sectors in Australia, Latin America, Africa, Canada and making its steel industry less competitive Russia are the investment hubs of today. globally, but is also making it less competi- Also responding to higher prices and tight supplies, tive in general, as well as raising social and steel producers are investing to become self sufficient political concerns as consumers are faced with and secure supplies of needed resources. For example, higher food and energy costs. Nucor Corp is acquiring scrap steel processing compa- Policy makers are facing the challenges of nies in the US, Arcelor Mittal is acquiring coking-coal striking a delicate balance of steady economic mining assets in Russia and has made contractual and employment growth with moderate inflation. purchases from South African collieries, and various 18 Mining Journal London, May 16, 200816-20MJ080516.indd 18 15/5/08 10:48:06
  • 4. WORLD ANNUAL REAL GDP GROWTH* (ANNUAL CHANGE) 2005 2006# 2007 E# 2008 F# 2009 F# (%) (%) (%) (%) (%) US 3.1 2.9 2.2 0.5 0.6 Latin America 4.6 5.3 5.6 4.3 3.6 Brazil 2.9 3.8 5.4 4.8 3.7 Japan 1.9 2.4 2.1 1.4 1.5 European Union 2.0 2.8 2.6 1.3 1.3 South Korea 4.2 5.1 5.0 4.2 4.4 Taiwan 4.1 4.9 5.7 3.4 4.1 China 10.4 11.1 11.4 9.3 9.5 Russia 6.4 7.4 8.1 6.8 6.3 CIS 6.6 8.2 8.5 7.0 6.5 India 9.0 9.7 9.2 7.9 8.0 Middle East 5.4 5.8 5.8 6.1 6.1 Africa 5.6 5.9 6.2 6.3 6.4 World 4.8 5.0 4.9 3.7 3.8 * Source: International Monetary Fund # Figures reflect the IMF data as of April 2008 published in its World Economic Outlook (except US, 2005) The above data is computed on the basis of purchasing power parity (PPP). If market exchange rates were used, world growth would be more than a percentage point less E denotes estimate, while F denotes forecast Japanese and Asian steel makers continue to expand commodities as an alternative asset class. While some ducers to raise prices, evidencing both healthy demand joint venture operating partnerships in South America of this interest is speculative and may be a hedge and tight supplies. or contractual agreements to purchase commodities against the decline of the US dollar and other technical Continued tight market conditions in the steel indus- such as iron ore and coking coal. considerations (rather than based solely on industry try have been exacerbated recently as supplies of vari- However, in the recent past there have been a record fundamentals), the trend underscores a view that recent ous materials were curtailed due to heavy snow storms number of mining and metals industry acquisitions and robust prices and tight supply in the commodities sec- in China, heavy rains in Australia and recent power mergers that have concentrated the supply of steel- tor will likely continue into the near future. outages in South Africa – all of which have added making raw materials in fewer hands, and certain na- This year is shaping up to be the fifth consecutive to cost pressures. However, as the US and European tions have sought to limit foreign control of resources. year when strong global economic growth will support economies slow, steel producers may want to review All of this is contributing to the greater investor record prices for steel, metals and other commodity plans and prepare for various economic scenarios and interest in the commodity sector in the past five years, products at levels well above historical trend lines. slower rates of growth. with investors allocating a greater share of capital in Conditions to date in 2008 have also enabled steel pro- Continued on page 20 www.mining-journal.com London, May 16, 2008 Mining Journal 1916-20MJ080516.indd 19 15/5/08 10:48:08
  • 5. FOCUS BUOYANT STEEL PRICES As was noted earlier, the steel industry in the major markets in North America, Europe and Asia is cur- rently seeing record prices, which reflect both healthy demand and producers passing on higher costs. For example, in Europe steel prices are higher due to the higher cost of iron ore and coking coal, with shortages reported in places. In North America, steel prices in certain segments were at all-time highs as of early 2008 as producers of flat and long products have also passed on higher raw material and transportation costs to customers. Contributing to tight supplies, there have been many Continued from page 19 years of industry restructuring, consolidating the share In addition to the need to continue managing higher of key steel product markets while vastly improving op- raw materials and energy costs, producers should erations, which has added to producers’ pricing power. strengthen ties with regions that are likely to continue As a result, steel prices in the US and Europe are higher benefiting from higher, sustainable growth. Alterna- in the first half of 2008 compared with 2007 levels. How- tively, refocusing strategies to benefit from record high ever, while the power and energy-related steel products orders in the oil and gas pipeline segment may be segments, including tubular pipe products, continue to another option. enjoy firm pricing, steel products used in the auto and housing sectors are forecast to be weaker later in the year. The markets in Asia as of early 2008 were also at near-record levels as steel makers pass along higher costs of materials, energy and transportation. However, these markets will be sensitive to any changes that occur in China and the developing economies. If these economies slow more than expected, the steel industry may face the unwanted result of surplus steel coming to market, as so much new steel-making capacity has been added in the past six years. Tim Alch, Anderson & Schwab Inc, New York. E-mail: timalch@gmail.com New Sources of High-Quality Pellet Feed in Sweden and Finland for the European and Middle Eastern Markets TSX.V: NAU A scoping study is underway on Northland’s iron projects in northern Sweden and Finland. Pilot scale test-work has OSLO BØRS: NAUR already demonstrated that magnetite concentrate from the Stora Sahavaara project can produce FRANKFURT: NBS.F high quality commercial-grade iron ore pellets. We’re now working on the basic engineering to confirm the project economics. Northland’s magnetite projects represent important potential sources of new iron ore production for the European and Middle Eastern markets. The region’s advanced infrastructure, including a rail link to deep-water ports, offers distinct advantages for reaching commercial markets at a time when the European community is placing renewed emphasis on securing domestic European mineral supplies. www.northlandresourcesinc.com The metallurgical work was performed under the supervision of Paul Marsden, VP Metallurgical Development and Operations for Northland. Mr. Marsden is a member of the IMMM, a Chartered Engineer and a Chartered Scientist and is the Qualified Person as defined in NI 43-101 responsible for overseeing the design and execution of the metallurgical test work program at Stora Sahavaara. 20 Mining Journal London, May 16, 200816-20MJ080516.indd 20 15/5/08 10:48:17

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