Unhappy new year

Those involved in the transportation of steel and iron ore related to China may enjoy a merry Christmas – but not necessarily a happy new year, if the latest projections on the cargo are to be believed. According to a China Metallurgical Industry Planning and Research Institute (MPI) report from late November, China’s crude steel output is anticipated to rise 3% to 832m tonnes this year. However, crude steel output growth in 2018 is predicted to be much more modest at just 0.7% in 2018, taking that year’s output to 838m tonnes.

Reasons for the outlook

There are also caveats to the rise forecast for this year. According to MPI, this year’s strong growth was partly due the Institute including a subpar steel product known as “strip steel” for the first time in 2017. Output of this product was between 60m and 70m tonnes in first half 2017 and made up 8.4% of the crude steel production in 2017. According to calculations by local media, if that figure had not been counted, crude steel production would have actually fallen 5.7% this year.

The production slowdown is the result of a nationwide campaign, started last year, to get rid of older capacity in China – an initiative involving sharp reductions in strip-metal mills in first half 2017. Some 600 such mills were closed in the six-month period, eliminating 120m tonnes of capacity. At the same time, many are anticipating China’s economy, including its real estate sector, to slow down in the short-term as the country’s government works to cool the market and overhaul large state-owned enterprises. Until now, the country’s economic growth and foreign demand – from a recovering world economy – have aided the continuation of relatively strong demand for steel from the manufacturing industry.

The MPI anticipated that the country’s steel demand would increase to 726m tonnes in 2018 from 722m tonnes in 2017, triggered by steady economic growth. The modest prediction reflects figures from the World Steel Association (worldsteel), who in its October 2017 Short Range Outlook, predicted that 2018 would show no growth over 2017 – or, in other words, no change in demand, “as the government resumes and strengthens its efforts on economic rebalancing and environmental protection”. The organisation further noted that the country closed the majority of its outdated induction furnaces in 2017 – a category generally not captured in official statistics – meaning that the demand from this market sector is now satisfied by mainstream steel makers and thus captured in the official 2017 data.

“Consequently, the nominal growth rate for steel demand in China increased to 12.4% or 765.7m tonnes,” it went on to explain. “Disregarding this statistical base effect, worldsteel expects that the underlying growth rate of China’s steel demand for 2017 will be 3%, which will make the corresponding global growth rate 2.8%.”

With regards to iron ore, the MPI forecast that iron ore demand from the country – China being the estimated third biggest producer of the commodity in the world – would increase 1.3%, to 1.122bn tonnes this year, from 2016, but drop 0.2%, to 1.12bn tonnes, in 2018. With regards to Chinese exports, it estimated that the country would export a net 63m tonnes of steel products in 2017 and 2018, up 3% and 0.7% respectively.

World forecasts

The disappointing outlook for steel for China – the country that both produces the most steel and uses the most finished steel products across the globe – reflects the forecast for the rest of the world. In a press conference put on by the MPI, the overall world demand for steel was forecast to be around 1.647bn tonnes in 2018 – a moderate increase of 1.7% compared with the anticipated 1.619bn tonnes in 2017. At the event, MPI vice president Xiao Bangguo said that 2018 will see a continuous global recovery and that the world economy can expect better growth. However, he also said that along with the recovery of the global economy, the main developed economies are trying to slowly move away from former quantitative ease monetary policies, meaning less support on the macro-policy side. Additionally, tougher industry competition, growing sentiments in favour of trade protectionism, possible competitive tax reductions and a complicated geopolitics situation are all factors that could entail negative influence on global economic growth. However, worldsteel was somewhat more optimistic about the future for the global steel market in its Short Range Outlook.

“Progress in the global steel market this year to date has been encouraging,” said TV Narendran, chairman of the worldsteel Economics Committee. “We have seen the cyclical upturn broadening and firming throughout the year, leading to better than expected performances for both developed and developing economies, although the MENA region and Turkey have been an exception.”

Mr Narendran said that risks to the world economy, including rising populism/protectionism, US policy shifts, EU election uncertainties and China deceleration, remained but had, to some extent, abated, leading worldsteel to conclude that they now see the best balance of risks since the economic crisis of 2008. However, the worldsteel Economics Committee chairman did note that risk factors remained in the form of intensifying geopolitical tension in the Korean peninsula, China’s debt problem and growing protectionism in many locations.

“In 2018, we expect global growth to moderate, mainly due to slower growth in China, while in the rest of the world, steel demand will continue to maintain its current momentum,” said Mr Narendran. “So, world steel demand is recovering well, driven largely by cyclical factors rather than structural.” The chairman did, however, note that the lack of a robust growth engine to replace China and a long-term decline in steel intensity because of technological and environmental factors would still “weigh on” future steel demand.

And while the slowdown of steel output growth in China could make room for other countries to pick up where China has left off, the limited global growth predictions for 2018 implies that there probably won’t be many new developments to take account of.