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Steel and the Chinese conundrum

LiveMint logoLiveMint 25-04-2017 Ravi Ananthanarayanan

Back in October, the World Steel Association had forecast that steel demand will grow by 0.2% in 2016 and by 0.5% in 2017. With only a few months for 2016 to end, even that estimate by the steel industry body was off the mark. Global demand improved and actually grew by 1%, and the April forecast has revised growth in 2017 to 1.3% and 0.9% in 2018.

That’s the risk in forecasting for an industry dominated by China. In steel, it had a 45% share of consumption in 2016 and produced half of global crude steel. Initial estimates of demand in 2016 were scaled down as China voiced its resolve to rebalance the economy away from investment-led growth. While its growth did slow down, worries about the economic fallout of a sharp slowdown saw the Chinese government toss in a stimulus package. That revived growth and steel demand picked up in the second half.

Even in 2017, while steel demand in China remains strong so far, World Steel expects it to turn lower as the government plans to clamp down on the real estate market, a main driver of consumption. As a result, the April forecast pegs China’s steel demand growth to be flat in 2017, and then decline by 2% in 2018. While flat growth may seem unimpressive, the October forecast had pegged a 2% decline.

Why does all this matter? Demand for steel will drive steel prices and output. The first two months of 2017 saw China’s crude steel output rise by 5.8%, and global output also increased by the same number. This growth in output had kept iron ore prices on the boil, which in turn also supports higher steel prices. But confidence in the steel situation has been slipping.

That seems to be justified, as World Steel’s production data for March, released on Monday, shows China’s output grew only by 1.8%. Surprisingly, however, global steel output rose by 4.6%, due to sharp increases in most major steel-producing regions. Still, this is but one month and it is better to wait before drawing any conclusions.

Coming back to demand, fears of a slowdown in China’s economy and its property market, and a longer wait for a revival in US spending on infrastructure are worrying the market. But a tighter supply can calm those nerves. China plans to eliminate polluting steel capacity, which can tighten supply. As of now, falling iron ore prices suggest either a surplus situation or an unwinding of financial investments.

The World Steel forecast expects India’s steel demand to be under pressure. Demonetization is believed to have hit real estate development. Although the April forecast growth rates for 2017 is better than the October forecast, that is because the 2016 figures came in lower. In tonnage terms, the revised forecast for 2017 has been scaled down. That’s a sobering thought for an industry where supply is rising steadily.

Higher steel prices and output were good news for the industry, parts of which are snowed under high debt. If steel prices turn soft as iron ore prices trend lower, that is a risk, especially as rising steel exports leave mills more exposed to international prices. In 2017, a lot depends on China fulfilling its promise to cut steel output, the rest of the world being rational with its steel production, and a revival in demand in key steel consuming markets in the developed and developing markets.

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