Market analysis and short term outlook

2.5% 2015 global GDP growth

Market overview

Global GDP growth fell short of expectations in 2015, slowing marginally, to 2.5% year-on-year, from 2.7% in 2014 (2.5% in 2013) as deceleration in key emerging economies overshadowed a modest recovery in major developed countries in 2015. This deceleration was accompanied by further declines in commodity prices, subdued global trade, bouts of financial market volatility, and weakening capital flows.

Domestic demand in the United States was supported by robust consumption and investment, with the exception of the oil sector. US GDP growth in 2015 is estimated at 2.5%, the highest annual rate in the post-2008 crisis period, with automotive sales growing by over 5% year-on-year to a record of 17.4 million. Nominal construction spending increased by around 10% year-on-year, with strong growth in both residential and non-residential construction. The weakness in net exports is the result of the strong dollar and softness in external demand, particularly from large emerging markets.

European Union (EU) GDP growth picked up in 2015 to around 1.8%, as domestic demand strengthened and eurozone exports were supported by euro depreciation. EU automotive sales grew by 9% year-on-year in 2015 to 13.7 million, their highest level since 2009. Activity firmed in Spain, but France and Italy lagged, while growth slowed in the United Kingdom remained stronger than the Eurozone average.

In China, GDP growth slowed in 2015 to an estimated 6.9%, while Brazil and Russia took a turn for the worse as a result of global and domestic headwinds, and the weakness in oil and other commodity prices. In South Africa, chronic power supply bottlenecks are a major factor behind weak growth. In contrast to other major developing countries, growth in India remained robust, buoyed by strong investor sentiment and the positive effect on real incomes of the recent fall in oil prices.

Global industrial production growth slowed to 1.5% year-on-year as production in OECD countries eased to just 0.9% year-on-year in 2015. Global apparent steel consumption (ASC) is estimated to have fallen by 2.2% year-on-year, mainly due to the slowdown in China. However, Chinese demand estimates are subject to change, due to significant revisions to steel production estimates to account for under-reported output by Chinese mills. Elsewhere, world-ex-China ASC fell by just 0.3%, as significant declines in CIS (-8%), NAFTA (-7%) and Latin America (-7%) were offset by growth in other regions, particularly EU28 (+3%), Asia ex-China (+5%) and Africa & Middle East (+4%).

Steel production

1.62bn tonnes world crude steel production

After declining sharply during 2009 to 1.2 billion tonnes, world crude steel production grew robustly each year to 1.65 billion tonnes in 2014, driven by rapid Chinese growth. In 2015 it fell for the first time since 2009, by 2.8%, to 1.62 billion tonnes, as steel consumption in developed and key emerging markets declined. Depressed demand and the availability of low-priced imports forced many producers across the world to curtail output.

The slowdown in China in 2014 and 2015 exposed the excess capacity issues faced by the steel industry, as Chinese producers increased export volumes to compensate for falling domestic demand. Chinese exports soared by 72% over the past two years, rising to a record 112 million tonnes in 2015. China accounted for 49.5% of global steel production in 2015, despite production declining by 2.3%.

Apart from China, almost all major steel producing regions also recorded a decline in production. EU28 steel output decreased by 1.8% to around 166.2 million tonnes, and North American by 8.5%. In the CIS, output fell by 4.3% as a recession lowered domestic demand and overwhelmed increased international competitiveness from weaker domestic currencies. South America saw a 2.5% decline in production as Brazilian steel demand faltered by around 15% due to economic issues facing the country. In India, however, production increased by 2.6%, while in Australia/New Zealand, production rose 4.6%.

Steel prices

International steel prices in 2015 were materially impacted by the domestic and export price of Chinese steel. At the start of the year, Chinese domestic steel spreads – the difference between the Chinese domestic hot rolled coil (HRC) price and the international raw material price basket – remained at reasonable levels, with a first quarter average of $146 per tonne (/t). However, as the price of Chinese steel began to fall to unsustainably low levels, Chinese spreads fell below $120/t in May 2015, leading to a second quarter average of $125/t.

$87 per tonne Q3 Chinese HRC spread

At the start of 2012, when Chinese HRC spreads had previously dropped below $120/t, they took approximately four months to recover back to that level. In 2015, however, the spread decline continued, reaching an average level of $87/t in the third quarter, before rising marginally to an average of $93/t in the fourth quarter. This dynamic impacted steel prices across the world considerably, with steel prices in 2015 following the trend set by Chinese HRC spreads.

Below we outline the steel price evolution over the year for the main markets.

Steel prices for flat products in Europe remained relatively stable in euro terms during the first quarter of 2015, against 2014 fourth quarter averages, despite continuous erosion of raw material costs. In Northern Europe, the HRC price improved slightly between January and March, to an average of €405-413 ($458-467) per tonne, and in Southern Europe to €395-404 ($446-456) per tonne. Economic conditions remained good in Europe during the second quarter of 2015, with strong bookings in industry and auto. Despite this, steel prices weakened on a monthly basis from April to June, due mainly to pressure from imports, and continued to weaken for the rest of the year, reaching, in the fourth quarter, €325-335 ($357-368) per tonne in Northern Europe and €293-304 ($322-333) per tonne in Southern Europe.

The United States had a mixed year. 2015 started positively with consumer confidence in February at its highest since 2007. The steel market was nevertheless challenging, due to high inventories and buyers’ caution in placing orders. A strong dollar continued to encourage imports during the first quarter of 2015. Domestic prices declined, especially during February and March, following declines in Scrap #1 Busheling, which fell from $369 per gross tonne in January to $255 per gross tonne in March. Spot HRC prices during the first quarter dropped from a $631/t average in January to $531/t in March, for a quarterly average of $578/t. The second quarter had a weak start, with declining scrap prices rolling over into April and HRC bottoming at $491-503/t, before stronger underlying demand helped prices reach $502-510/t in May. Scrap #1 Busheling reached an average of $266 per gross tonne for the second quarter of 2015, supporting HRC price improvement to $507-514/t in June, for a quarterly average of $500-509/t.

Despite the consumer confidence index increasing in August and steel consumption being sustained by strong auto sales, prices started weakening again during the third quarter, as US prices realigned to those globally, and scrap prices failed to provide cost support. Demand for both scrap and finished steel during the fourth quarter remained weak due to destocking, and Scrap #1 Busheling fell to $167-180 per gross tonne, pushing the HRC spot price down to $421-438/t.

In China, 2015 began with increased uncertainty due to a change in export rebate policy and the government’s efforts to implement anti-pollution regulation, which affected producer costs and possible cuts to capacity. The steel market remained depressed in the first half due to declining real estate demand, but production was sustained by exports, which surged from March onward. Domestic prices continued their accelerated decline, and spot HRC was down to $357-362/t VAT excluded, during the first quarter, and continued to weaken, finishing the year at $250-252/t, VAT excluded.

Long products saw resilient demand in Europe in early 2015, and a slight increase in scrap price gave support for improvement on commodity pricing, despite pressure from Russia and Ukraine. Buyers became more hesitant towards the end of the first quarter as the scrap price weakened. Medium section prices, however, saw some improvement from January to March with a quarterly average of €512-522 ($577-589)/t. Rebar prices, on the other hand, were impacted to a greater degree by scrap fluctuation, and declined to an average range of €413-422 ($466-476)/t. The European Central Bank’s lending survey at the beginning of the second quarter sustained a take-off for construction investments, thus demand continued to be solid from April to June. Prices began to drop in the third quarter, as pressure on scrap from international markets resulted in scrap prices dropping, impacting commodity offers. The year ended with medium sections at €474-486 ($519-532)/t, and rebar prices at €366-374 ($401-410)/t.

Raw materials

61% iron ore price decline since beginning of 2014

The spot markets for iron ore and coking coal have been in a downward price trend since the first half of 2014. In 2015, this trend gained momentum with a slower growth rate in China, recession in developing economies such as Brazil and Russia, and continued robust seaborne supply from major miners. Since the beginning of 2014, the iron ore and coking coal prices decreased by 61% and 37% respectively (Platts Q4-2015 vs. Q1-2014). As for pricing mechanisms, since 2012 quarterly and monthly pricing systems have been the main type of contract pricing mechanisms, but spot purchases also appear to have gained a greater share of pricing mechanisms as steelmakers have developed strategies to benefit from increasing spot market liquidity and volatility. In 2015, the trend for using shorter-term pricing cycles continued, with the spot market remaining liquid and driven by Chinese demand.

Outlook for 2016

Overall, we expect the market to stabilise in 2016. In the US, underlying demand continues to expand and due to the expected absence of a further destock in 2016, we expect ASC in the US to grow by 3% to 4%. In Europe, we expect the pick-up in underlying demand to continue, but apparent demand to grow modestly at 0% to 1%, since the high level of imports in the fourth quarter of 2015 have raised inventory levels particularly in Southern Europe. We expect demand in Brazil to decline further, albeit more slowly, as the economy remains mired in recession. With the ongoing recession in Russia impacted by weak oil prices, we expect demand in CIS to decline 5% to 6%, while in China, we expect it to decline around 1%, as a result of ongoing weakness in the real estate sector.