Starting 2013, the world has seen a dramatic fall in steel prices. The so called commodity super cycle which started at the start of the millennium has come to an end. Steel producing firms are frantically trying to reduce capacity, since prices no longer justify production.
The chart below shows the price of iron ore as per China’s import prices. As can be seen from the chart, prices of iron ore started picking up at the end of 2008 and rose to a peak of $187.18 per metric ton at the start of 2011. Starting 2013, iron ore prices have rapidly fallen and ended the year 2015 at a price of $39.6 per ton. The reason as to why iron ore prices are important when analysing steel prices is that 98% of all iron ore mined to converted into steel.
Let us now look at China which is probably the most important country when it comes to global steel prices.
In the year 2015, China accounted for 49.5% of global steel production and 45.3% of global steel consumption. Thus China is the single most important country when it comes to the global steel market.
Any change in demand and supply condition is the China has a huge impact of global prices of steel.
Now turning to production and consumption data in the global steel market during the two periods which signify rising prices (2008-2012) and then falling prices (2013-?)
Rising prices (2008-2012)
Between the years 2008 and 2012 iron ore prices rose rapidly, prices rose to a peak $187.18 per metric ton in February of 2011. Iron ore prices were $36 at the end of 2007.
If we look at the chart below, steel prices also showed a similar trend. The Shanghai steel rebar futures and Shanghai steel wire rod futures both hit their peaks of 5218 and 5018 respectively during February of 2011.
Below is a table which shows the growth in demand for and supply of steel between the years 2007 and 2012.
Thus, we can see from the above table that growth in demand for steel exceeded the growth in production of steel by 2% in the given time period. If we exclude Chinese production and consumption data, global production of steel and global demand for steel actually declined by 3.2% and 4.3% respectively.
If we look at absolute numbers, global steel produced in 2012 stood at 1,541.9 million metric tons as compared to 1,342.2 million metric tons in 2007.
While demand for steel in 2012 stood at 1,412.1 million metric tons as compared to 1,208.6 million metric tons in 2007.
For China, steel production in 2012 stood at 716.5 million metric tons as compared to 489.2 million metric tons in 2007.
On the demand side, stood at 646.2 million metric tons in 2012 as compared to 408.3 million metric tons in 2007.
Fall in prices (2013-?)
Since peaking in 2011, iron ore prices remained elevated till the end of 2012. In 2013, iron ore prices started fluctuated between $114.81 and $154.64. Iron ore ended 2013 with a price of $135.79 per metric ton. By December of 2014, iron ore prices had fallen by nearly 50% to $68.8 per metric ton. Iron ore prices ended 2015 at a price of $39.6 per metric ton, thus, falling a further 43% during 2015.
If we look at the Shanghai steel rebar futures and Shanghai steel wire rod futures, they display a similar trend. During 2013, steel rebar futures fluctuated between 4214 and 3325 while the steel wire rod futures fluctuated between 4014 and 3437. By the end of 2014, The steel rebar futures stood at 2575 and the steel wire rod futures stood at 2840 a decline of 29% and 22% respectively. By the end of 2015, both futures had fallen further, steel rebar futures stood at 1773 while the wire rod futures stood at 1830 a decline of 31% and 35% respectively.
Below is the production and consumption data for steel between the years 2012 and 2015.
Thus, we can see once again from the above table that growth in demand for steel exceeded the growth in production of steel by 2% in the given time period. If we exclude Chinese production and consumption data, global production of steel and global demand for steel actually declined by -1.4% and 8% respectively. Thus, China instead of pushing up growth in global demand for steel is now pulling it down by 0.9%. On the other hand, China is pushing of the growth in global supply of steel by 6.6%.
Taking absolute numbers, global steel produced in 2015 stood at 1,622.8 million metric tons as compared to 1,531.9 million metric tons in 2012.
While demand for steel in 2015 stood at 1,513 million metric tons as compared to 1,412.1 million metric tons in 2012.
For China, steel production in 2015 stood at 803.8 million metric tons as compared to 716.5 million metric tons in 2012.
On the demand side, stood at 685.9 million metric tons in 2015 as compared to 646.2 million metric tons in 2012.
Overview: China Stimulus Package (2008)
As can be seen from the above data, there has been an oversupply in the steel market in both the time periods which have been considered above. In fact, the world has been in a state of oversupply since the year 1990, i.e. in every year since 1990, production of crude steel has exceeded the consumption of crude steel.
Chinese Stimulus Package
The rise and fall in Iron ore prices and hence steel prices can be attributed to only one factor, this factor is China. In response to the 2008 global economic downturn the Chinese government announced a stimulus package. The main feature of this packed was a boost to the construction sector. This boost is what explains the 58.3% jump in demand for steel between the years 2007 and 2012.
In 2013, the Chinese economy started showing signs of slowing down due to various factors. These factors have led to the rebalancing effort which has now been undertaken by the Chinese government. The casualty in this rebalancing effort is the demand for steel since the focus has been shifted from investment led growth to consumption led growth, thus new construction projects have come down and hence the growth in demand for steel has fallen to 6.1%.
But, in the mean while steel producers in China continued to expand production, growing at a healthy pace of 12.2% between the years 2012 and 2015. Unable to sell their produce at home, Chinese producers have tried to increase their exports. Thus, competition in the global markets has led to them trying to reduce prices and clear stock.
Expectation and prices
Prices are a lot about expectations i.e. prices rise if we expect them to rise. One possible reason as to why iron ore and hence steel prices continued to rise even though the market was oversupplied is that producers expected Chinese demand to increase and hence preempted a rise in price, thus, raising prices of their own products before hand. This process continued until reality caught up in 2013 when Chinese demand increased at a slower than expected pace and prices came crashing down.
Iron and Steel sector is one of the most important sectors for any economy, the entire construction sector of a country depends on it. This fall in prices has had a crippling effect on this sector since many of these firms are making losses, just a few weeks back Tata Steel the 11th largest steel producer in the world decided to put its entire U.K. business up for for sale due to large losses.
If we look at oversupply data, then the fall in prices has still got some way to go. If we look at expectations, there is no real reason to expect demand for steel dramatically rise in any part of the world. Thus, this slump in steel prices is probably here to stay for the near future.