Iron and Steel Market

Starting 2013, the world has seen a dramatic fall in steel prices. The so called commodity super cycle which began at the start of the millennium has come to an end. Steel producing firms are frantically trying to reduce capacity since steel prices which fell by nearly 35% in 2015 no longer justify production.

Iron ore prices are extremely important while analysing steel prices, 98% of all iron ore mined is converted into steel. 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 fallen rapidly and ended the year 2015 at a price of $39.6 per ton.

Iron

 

China & Steel

In the year 2015, China accounted for 49.5% of global steel production and 45.3% of global steel consumption. Thus, China is the most important country when it comes to the global steel market. Any change in demand and supply condition in the country has a profound impact on the global steel market.

 

Below is the production and consumption data for steel. The data has been divided into two periods signifying Rising prices (2008-2012) and then Fall in prices (2013-?).

Rising prices (2008-2012)

Between the years 2008 and 2012 the price of iron ore rose rapidly, rising to a peak of $187.18 per metric ton in February of 2011 compared to $36 per metric ton in December of 2007.

If we look at the chart below, steel prices have shown a similar trend. The Shanghai steel rebar futures and Shanghai steel wire rod futures both hit their respective peaks of ¥5,218 (Yuan) per ton and ¥5,018 per ton in February of 2011.

Below is a table which shows the region wise break up of growth in the demand and supply of steel between the years 2007 and 2012.

Growth in steel production and output between 2007 and 2012We can see from the 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 declined by 3.2% while global demand for steel declined by 4.3%.

World
Taking absolute numbers, global steel production stood at 1,541.9 million metric tons in 2012 compared to 1,342.2 million metric tons in 2007.

While demand for steel stood at 1,412.1 million metric tons in 2012 compared to 1,208.6 million metric tons in 2007.

China
For China, steel production was 716.5 million metric tons in 2012 compared to 489.2 million metric tons in 2007.

While on the demand side, 646.2 million metric tons of steel was demanded in 2012 compared to 408.3 million metric tons in 2007.

Steel prices

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 at 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 ¥3,325 per ton and ¥4,214 per ton, while the steel wire rod futures fluctuated between ¥3,437 per ton and ¥4,014 per ton. By the end of 2014, the steel rebar futures stood at ¥2,575 per ton and the steel wire rod futures stood at ¥2,840 per ton, an annual decline of 29% and 22% respectively. By the end of 2015, both futures had fallen further, steel rebar futures stood at ¥1,773 per ton while the wire rod futures stood at ¥1,830 per ton, a decline of 31% and 35% respectively.

Below is the production and consumption data for steel between the years 2012 and 2015.

Growth In steel production and demand between 2012 and 2015
Thus, once again we can see from the 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 actually declined by 1.4%, while global demand for steel increased by 8%. 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 pushed up the growth in global supply of steel by 6.6%.

World
Taking absolute numbers, global steel production stood at 1,622.8 million metric tons in 2015 compared to 1,531.9 million metric tons in 2012.

While global demand for steel stood at 1,513 million metric tons in 2015 compared to 1,412.1 million metric tons in 2012.

China
For China, steel production was 803.8 million metric tons in 2015 compared to 716.5 million metric tons in 2012.

While demand for steel stood at 685.9 million metric tons in 2015 compared to 646.2 million metric tons in 2012.

 

Overview & Analysis: China Stimulus Package (2008) & Expectations

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 global steel market 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 been undertaken by the Chinese government. The casualty in this rebalancing effort is the demand for steel since the focus has shifted from investment led growth to consumption led growth, thus, new construction projects have reduced and hence the growth in demand for steel has fallen to 6.1%.

But, in the mean while steel producers in China have 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, in an attempt to clear unsold stock they have cut prices which has led to a fall in global steel prices.

Expectation and prices
Prices depend a lot on expectations i.e. prices rise if we expect them to rise. One possible reason for the rise in iron ore and hence steel prices even in an oversupplied market is that producers expected Chinese demand to increase. Hence, producers preempted a rise in steel prices due to this increase in demand, 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. The fall in steel prices has had a crippling effect on the sector since many 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 sale due to large losses.

If we look at demand and supply data, then the steel market is still oversupplied. 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.


All the above data has been taken from the world steel association.

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