Sang-Hak Lee, POSCO Research Institute - Key Drivers of Steel Demand and Outlook
 

Sang-Hak Lee, POSCO Research Institute - Key Drivers of Steel Demand and Outlook

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Sanghak Lee, Senior Economist, POSCO Research Institute delivered this presentation the 2014 AJM Global Iron Ore & Steel Forecast Conference and Exhibition. ...

Sanghak Lee, Senior Economist, POSCO Research Institute delivered this presentation the 2014 AJM Global Iron Ore & Steel Forecast Conference and Exhibition.

The annual AJM Global Iron Ore and Steel Conference is the world's largest gathering of iron ore and steel executives. Over the past 16 years thousands of industry personnel have attended, recognising it as the conference that delivers vital information on the status of the global iron ore and steel sectors.

For more information, visit http://www.globalironore.com.au/home

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Sang-Hak Lee, POSCO Research Institute - Key Drivers of Steel Demand and Outlook Sang-Hak Lee, POSCO Research Institute - Key Drivers of Steel Demand and Outlook Presentation Transcript

  • 1 March 12, 2014 Global Iron Ore & Steel Forecast 17th Annual Conference Changes ahead Key Drivers of Steel Demand and Outlook
  • 2 Steel leadership shifts along the stagnant demand Structural Changes in the Steel Industry – Past U.K. (19C) U.S. (1910-1960) Japan (1970-1990) China (2000-present) Stagnation - 1907-1946(about 40yrs) - Annual avg of 1.9% The third boomThe second boom - 1875-1907(about 33yrs) - Growth at annual avg of 10.8% - Beginning of the world’s steel industry - 1946-1973(About 27yrs) - Annual avg of 7.0% - 1998-2007(about 9 yrs) - Annual avg of 6.3% The first boom Stagnation - 1973-1998(about 25 yrs) - Annual avg of 0.9% - The first and second oil shocks 12 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1875 1900 25 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 Global steel production Excluding China China’s steel production - 2008-present - Annual avg of 2.3% Stagnation? (billion tons)
  • 3 Adopted new steel-making technology - Industrial Revolution and Bessemer process - Used coal within the area  Key: Innovative technology Coastal steel mills as a new business model - Commercialization of continuous casting - LD converter - Mass production through large blast furnaces  Key: Technology and raw materials Open-hearth furnace, Integrated steel mills - Automobiles expansion, railway revolution - Domestic market, self-sufficient raw materials  Key: Market and raw materials Demand grown rapidly - Led by automobile and shipbuilding industries - Use the existing technology, adopt new facilities - Domestic coal reserves, abundant labor force  Key: Large domestic market Structural Changes in the Steel Industry – Past
  • 4 Structural Changes in the Steel Industry – Present 40% 35% 55% 42% 40% 25% 18% 6% 23% 15% 2% 3% 9% 14% 12% 28% 20% 21% 24% 23% 17% 16% 5% 7% Source : worldsteel, KOSA, NSRI, Eurofer Others Machinery (2012) (2012) (2011) (2012) (2012)
  • 5 2000-2007 2008-2011 6.8% 2.7% (steel production) △4.1%p ① Growth 2007 2012 13.2% 0.2% (Top 10 steel makers) △13.0%p ② Profit Source : worldsteel Source : Bloomberg 2005 2012 9 companies 7 companies (Fortune 500 firms) △ 2 ③ Company Value Source : Fortune *Excluding 4 Chinese steel companies* Operating profit/Sales Structural Changes in the Steel Industry – Present
  • 6 China, the core of the global steel, is staggering China Risk (Unit : %, yoy) Oversupply across industries - On average, 28% in the manufacturing, 21% in the steel and 12% in the auto industry Protectionism - Rapid increase in case filing against China over anti-dumping and countervailing duties Slowdown of China’s GDP growth Serious oversupply - Capacity reached 1 billion tons - Construction of large steel mills continues Sharp fall in growth and profit - Demand increase around 4% - Operating profit near zero Steel - Its status as a leader falls sharply - Mecca of growth  Epicenter of chaos Structural Changes in the Steel Industry – What is the Problem? Impact of uncertain global economy 9.7 9.5 9.1 8.9 7.9 7.6 7.4 7.9 7.7 7.5 7.8 7.7 '11.1Q 3Q '12.1Q 3Q '13.1Q 3Q
  • 7 Hebei 42.8 Bao Steel 42.7 Wuhan 36.4 Shagang 32.3 Shougang 31.4 Ansteel 30.2 Player Steel production Baoshan 17.7 Source : worldsteel, million tons Source : worldsteel Structural Changes in the Steel Industry – Future? Source : worldsteel 2000 2012 55 million tons Export 11 million tons 15.1% 46.9%48.5%
  • 8 - Struggle over interests between the central and local governments - Difficulty in systematic restructuring due to inadequate financial system - Sharp decline in profits of steelmakers  Rising pressure for survival and restructuring - Financial costs in the distribution process : Increase 50% per ton - Limits to the steel industry heavily depending on gross fixed capital formation - Basis for growth, such as investment in infrastructure, has weakened The Xi Jinping government, “The government won’t continue to provide the current level of financial support. We’ll follow the logic of market even if that means decreases in steel production.” The new government’s policies for the steel industry The Steel Industry Market concentration (Top 10 companies) 3~5 global companies 60% * Joint statement released by 12 government ministries (Jan. 22, 2013) Structural Changes in the Steel Industry – Future?
  • 9 After the low growth trap in the SR, New Normal is 3% Source : Global Insight, Note: On the basis of PPP Around 4% before the crisis  2% recently  Low- to mid-3% after 2015 % World New Normal Low Growth -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 00 02 04 06 08 10 12 14 16 18 20 22 Emerging Countries Developed Countries % 8.0 4.0 0.0 4.0 8.0 12.0 00 02 04 06 08 10 12 14 16 18 20 22 China India Brazil Russia Challenging Environments – ① Delayed recovery of the world economy Developed economies : Prolonged low growth due to excessive national debt and accumulated current account deficit Emerging economies : Return to a New Normal of 5% from a high growth of 8% - BRICs : Growth expected to slow down compared to that before the global economic crisis
  • 10 Steel industry faces stagnant growth engines Worldsteel.org has adjusted down its continued low steel demand projection Annual growth in global steel demand will slow down to around 2% for the next 10 years, after recent high level of 5% - China moves into slower growth phase, while emerging economies struggling with structural issues Source : worldsteel (Oct 2013)Source : worldsteel, POSRI Challenging Environments – ② Slow growth in steel demand World China India 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 22 (mil tons) Note: Apparent steel use, finished steel 1,219 1,219 1,141 1,300 1,403 1,430 1,475 1,523 7.0 0.0 -6.4 14.0 7.9 2.0 3.1 3.3 -10.0 -5.0 0.0 5.0 10.0 15.0 800 1,000 1,200 1,400 1,600 '07 '08 '09 '10 '11 '12 '13(e) '14(f) demand (mil tons) y-o-y growth (%)
  • 11 Overcapacity, a continued crucial issue (million tons) Excess steelmaking capacity is estimated at 525 million tons around the world (2013) - East Asia has more than 50% of total surplus - Steel capacity utilization ratio trends down to mid-70%, from 90% of the pre-Crisis level Source : worldsteel, POSRI Korea 666 808 205 250 2012 2022 69 6665 68 2012 2022 106 136 12 -11 2012 2022 29 40 20 12 2012 2022 62 78 -28 -35 2012 2022 77 115 24 11 2012 2022 27 40 7 0 2012 2022 56 60 23 30 2012 2022 Africa India China Brazil USA ASEAN Japan Overcapacity Crude Steel Consumption Challenging Environments – ③ Global overcapacity
  • 12 High raw material costs laying heavier burden Prices of iron ore and coking coal rose 7.4x and 3.6x respectively (2000~13) - Despite having decreased, the prices remain high, and its volatility has increased since quarterly pricing was adopted (2Q ’10) Cost portion of raw materials in the steelmaking cost getting higher - High costs can be attributed to various supply risks(oligopoly, low grade materials, natural disasters) - China’s high production cost serves as the lower limit of international raw material price 49.8 49.0 58.3 61.4 69.9 70.0 74.0 '00 '02 '04 '06 '08 '10 '12 Note: On the basis of integrated steel mills, Source: MBR, etc. 0 50 100 150 200 250 300 350 '00 '02 '04 '06 '08 '10 '12 '14.1 Coking coal (hard coking coal, Australia FOB) Iron ore (iron ore fines, Fe 62%, China CFR) 131 143 289 161 61 91 18 51 172 250 125 40 Challenging Environments – ④ High raw material cost (%)($/ton)
  • 13 Varied Demand & Competing Alternative Materials ∙ Lighter car bodies ∙ Electric vehicles ∙ Hydrogen-fuel cars ∙ Extra-large vessels ∙ Eco-ships ∙ Efficient transportation ∙ Oil fields in deep sea & coldest places ∙ Shale gas Changes in Steel-using Sectors Decline of Steel Use + 2012 980 (57%) 1,720 740 2025 710 (46%) 1,550 840 Source : Ducker Worldwide Steel materials Non-ferrous materials (Polymer, Aluminum) Steelmakers must provide technical solutions, as well as the steel product itself Challenging Environments – ⑤ Customer needs / Steel alternatives
  • 14 Soaring environmental costs & emergence of new energy * CCS: Carbon Capture and Storage * ETS: Emission Trading Scheme Tighter regulations on environmental pollutions, such as greenhouse gas emission, have driven up costs - Need to use clean energy and CCS technology to reduce CO2 emissions Shale gas could lead to structural changes in cost competitiveness among steelmakers Challenging Environments – ⑥ Environmental issues and energy
  • 15 1,511 1,700 1,950 717 815 930 2012 2017 2022 For the next decade, low growth is inevitable without next growth engine and recovery of economy - Global steel production is expected to rise by 400 million tons to reach 1.95 billion tons in 2022 Growth will improve due to new coastal integrated steel mills in Southern China - Baosteel’s Zhanjiang mill by the end of 2015, Wugang's Fangchenggang mill around 2017 Source : worldsteel, POSRI * Steel demand outlook considering economic growth, fixed asset investment and each country’s plan to expand facilities (million tons, % CAGR) 2.4% 2.8% 200 400 600 800 1000 1200 1400 1600 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Steel in the world Steel in China Steel: World 4.7%, China 17.6% Price: Iron ore -1.3%, Coking coal -0.6% Steel: World 10.8%, China 31.5% Price: Iron ore 21.7%, Coking coal 15.8% 1992-2002 2002-2012 China Effect Global Steel production, low growth for next 5 years China’s steel production to be only 2.6% of annual growth ∆ RM Price > ∆ Steel Production  Increased Volatility Outlooks on Demand 2.6% 2.7% W O R L D C H I N A(mil tons, % CAGR)
  • 16 Conclusion Steel industry faces an unprecedented crisis - Stagnant demand, Oversupply  Intense competition - Low steel prices, High RM costs  Profit squeeze Breakthrough opportunities are pursued - Urbanization and population growth - Innovations in sustainable technologies for product and process - Excess capacity absorbed in the long term Cooperation between steel and raw materials - Necessary for win-win growth
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