Nerves of steel

The World Steel Association, or IISI, has released its Short Range Outlook for 2016 and 2017, in which it predicts global steel demand to decrease by -0.8% to 1.,488bn tonnes in 2016 following a contraction of -3% in 2015. World steel demand will not return to growth until 2017, it adds, with a 0.4% increase to reach 1.494bn tonnes.

Chairman of the worldsteel Economics Committee TV Narendran acknowledges the troubles facing the steel industry and by association the dry bulk shipping sector: “The economic environment facing the steel industry continues to be challenging, with China’s slowdown impacting globally across a range of indicators contributing to volatility in financial markets, sluggish growth in global trade, and low oil and other commodity prices.

The global steel market, in particular, is suffering from insufficient investment expenditure and continued weakness in the manufacturing sector.” Still, Mr Narendran adds that while the IISI has predicted another year of contraction in steel demand in China, slow but steady growth in some other key regions – such as NAFTA and the EU – is also expected in 2016 and 2017.

What’s more, several emerging economies in South and Southeast Asia will show resilient growth and, along with NAFTA and the EU, will support a recovery in 2017, according to the IISI. “We expect that steel demand outside of China will continue to grow by 1.8% in 2016 and 3% in 2017,” it says.

However, the IISI admits there are more than a few downside risks to its forecast: The Chinese real estate market and corporate debt problem; anxiety in the financial markets; high (household) debt and volatile capital flows in many emerging economies; and, geopolitical tensions and unstable political situations in several regions, which could further worsen the global economic environment.

THE CHINA FACTOR

The Chinese economy has continued to decelerate while the country tries to rebalance its progress. The severe depression in China’s construction activities has contributed to a slowdown in the manufacturing sectors, especially metal products, as well as slower growth in automotive. And, according to the IISI, a recovery for the construction sector is not expected in the near future.

“The decline in China is expected to be -4% in 2016, followed by -3% in 2017,” it says. “This suggests a demand of 626.1m tonnes steel – 15% down from 2013 – for 2017, a contraction to 41.9% of world steel use from 47.9% in 2009 and 44.8% in 2015.”

Meanwhile, Fitch Ratings has taken a look at the pricing side of the steel sector, reaching the conclusion that the rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elevated speculation about the future steel market. “Fitch expects supply of steel to increase as rising prices lead to capacity resumption, but without a sustainable rise in demand,” it says. “This will put significant pressure on steel prices in the near term.”

SLOW GROWTH BITES BACK

With the deep integration of China in the global manufacturing supply chain, this sector has slowed as a consequence of weak growth in global trade. Manufacturing exports in emerging economies have declined due to slower Chinese demand, particularly in Asia, says the IISI. The same is true for developed countries experiencing a reduction in the exports of consumer goods and machinery.  

“Specifically, the mechanical machinery, metal goods and other transport sectors are weakening, but the automotive sector will maintain its growth momentum supported by strong demand in many countries,” it adds. “Outside China, the construction sector is expected to maintain its mild but steady recovery momentum, particularly in India, the MENA and ASEAN regions.”

Elsewhere, steel demand in some emerging economies continues to perform below expectations, says the IISI. Brazil and Russia, for instance, are both struggling with their internal and structural issues, and steel demand in both economies is expected to contract strongly in the period ahead.

In particular, the Brazilian economy continues to suffer with political uncertainty, and this has resulted in a severe contraction in steel demand of -16.7% in 2015. It will also contribute a contraction of -8.8% in 2016, with a recovery of just 3.1% in 2017, adds the IISI.

India’s prospects, however, are brightening due to low oil prices, the reform momentum and policies to increase infrastructure and manufacturing output. According to the IISI, the country’s steel demand will increase by 5.4% in both 2016 and 2017, reaching 88.3m tonnes in 2017.

Similarly, in Turkey, steel demand is expected to grow by 3.3% in 2016 and 3.2% in 2017, supported by the government’s focus on pro-growth economic policies and low oil prices. 

Steel demand in Thailand, Malaysia, Vietnam, Indonesia and the Philippines is also expected to maintain a growth rate of around 6% despite their exposure to China, and will reach 74.6m tonnes in 2017, says the IISI, largely as a result of infrastructure building activities.

In emerging and developing economies, excluding China, steel demand is forecast to grow by 1.8% and 4.8% in 2016 and 2017 respectively. Demand in these economies will amount to 457.1m tonnes in 2017, accounting for almost 30% of the world steel demand.

In the EU, a mild recovery in steel demand continues with generally improving economic sentiments and investment conditions. However, uncertainties in the political landscape related to the refugee crisis and Britain’s mooted departure from the European Union rise risks to the improving economic condition. Steel demand in the EU is, therefore, forecast to grow by 1.4% in 2016 and a further 1.7% in 2017, according to the IISI.

In the US, steel demand is being dampened by the fall in oil prices and a strong dollar. Nevertheless, the IISI says that an improving job market and a robust housing sector will support steel demand, and it expects steel demand in the US to grow by 3.2% in 2016 and 2.7% in 2017.

Some pockets of brightness, however, cannot counter a second year of contraction in global steel demand and while a return to growth is predicted in 2017 it is minimal growth and certainly not enough to cheer capesize owners.