Ripple effects

The amount of steel produced in China in January 2015 dropped by 4.7 compared with January of the prior year, a change likely foreshadowing the end of a 15-year surge in that country’s steel output.

Because China now produces roughly half of the world’s steel, when its steel sector sneezes so violently, the rest of the world is likely to catch the same cold.

The smaller stream of finished steel exports flowing from China that has gone hand in hand with that nation’s need to cut capacity is one of several factors being cited for falling prices for finished steel around the world.

Many steel analysts foresee 2015 as the first year of a phase of the flattening out of production in China, and based on the early returns, this scenario likely is gaining favor. To what extent steelmakers in the U.S. can cope with price volatility stemming from global conditions is one of several sources of concern closer to home.
 

Respectable introduction

If the steel industry has truly entered perilous times in 2015, the lead-in to the drop-off contained mixed signals as far as pricing and industry statistics in 2014.

Global steel production rose modestly in 2014 relative to 2013, according to statistics from Brussels-based World Steel Association (WorldSteel).

World steel output increased by 1.1 percent in 2014, rising to 1.64 billion metric tons from the previous year’s figure of 1.62 billion metric tons. World leader China’s output rose 0.9 percent from 815.3 million metric tons in 2013 to 822.7 million metric tons in 2014.

Looking solely at steel output figures as a barometer for iron ore and ferrous scrap demand, 2014 featured a stable business environment with some evidence of regional fluctuations.

In addition to China’s 0.9 percent growth, steelmakers in the United States produced 1.7 percent more steel in 2014 than they did the year before, rising to 88.3 million metric tons of total output.

Steel production in the European Union rose by almost an identical percentage as that of the U.S. at 1.8 percent. Total EU steel output in 2014 was 169.2 million metric tons, an increase from 166.3 million tons produced in 2013.

Production in Turkey (a leading destination for exported ferrous scrap from the U.S. and the EU), however, fell by 1.8 percent in 2014, with output declining by some 600,000 metric tons.

Among the solid performers in 2014 were South Korea, up by 7.5 percent, or nearly 5 million metric tons; Saudi Arabia, with output up by 15 percent, or more than 800,000 metric tons; and Mexico, which produced more than 750,000 metric tons of steel compared with the year before, for a 4.2 percent increase.

Two nations with dramatically reduced outputs suffered from geopolitical and internal economic woes, respectively: Ukraine, where production dropped by 17.1 percent, or more than 5.5 million metric tons; and Venezuela, with a 31.5 percent output decline on the order of 650,000 metric tons.

Regional disparities notwithstanding, 2014 was a year of stability in steel production and, correspondingly, in ferrous scrap demand as well.

The first quarter of 2015, however, has ushered in the end of that the era of stability. China’s ability to come close to last year’s steel output figure is in question.

Even before the monthly output decline of 4.7 percent was announced in late February, China’s January 2015 iron ore import figure served as a warning. In early February, China’s General Administration of Customs agency reported the nation’s iron ore imports in January fell to 78.57 metric tons, down almost 10 percent from 86.85 million metric tons the previous month and from 86.83 million metric tons in January 2014.

Coincidentally or because of ripple effects, scrap recyclers in North America began feeling the effects of what could be described as a major slowdown in steel output looming in China.
 

Straining the supply chain

Just as China’s enormous growth in steel output from 2000 to 2014 helped boost iron ore and ferrous scrap pricing, China’s 2015 slowdown is a market influence resulting in negative symptoms.

After witnessing ferrous scrap prices drop below $400 per ton in October 2014 (and stay there), scrap processors and traders in the U.S. endured another sharp price drop in early February 2015.

Scrap buyers from mills in the U.S. and those representing overseas destinations offered prices in the range of $227 to $240 per ton for heavy melting steel (HMS) and shredded grades to American sellers in early February.

The export prices marked a steep drop, but those prices had been drifting steadily downward for several months in a row. American mills, meanwhile, had been paying relatively stable prices between October 2014 and January 2015.

“Markets are real ugly,” a ferrous scrap buyer in the U.S. Midwest said in mid-February, “and it doesn’t look like it is going to change anytime soon.” The buyer added, “Steel mills are under a lot of pressure, and the export market stinks because the U.S. dollar is strong.”

Scrap buyers for mills in the Chicago area were able to buy No. 1 busheling for $255 per ton in early February, according to American Metal Market (AMM), while shredded scrap dropped to $245 per ton, and No. 1 HMS was purchased at $230 in the region.

After the February price drop left scrap processors reeling, they had to decide whether to prepare for a trough of considerable duration or to be ready if prices rebound, should the U.S. have a busy spring construction and automotive sales season.

One potential signal for prices to stabilize or even rebound in the U.S. will be the return of bulk ferrous scrap cargo buying at U.S. ports. According to an AMM report in mid-February, shippers on both the Pacific and the Atlantic Coasts of the U.S. booked bulk shipments, with buyers from China and South Korea buying at the new lower prices off of the Pacific Coast, and buyers from Turkey coming back into the market on the Atlantic Coast.

Whether demand from North American mills is hearty enough to strain supply will help determine to what extent ferrous prices rebound. On average, steel mills continue to run at about a 73 percent capacity in the U.S., though the first week in February 2015 did witness a 3 percent drop in U.S. steel output compared with the week before.

While a 73 percent capacity rate is well-below where steelmakers in the U.S. wish to be, the figure is one to envy in India. Scrap recyclers from that nation gathered in early February 2015 to talk about the state of their industry.

Appearances can be deceiving

If North American ferrous scrap recyclers are looking for overseas buyers to help out on the demand side, business conditions in India may play a role in 2015.

Judging by some statistics, India’s overall economy and steelmaking sector appear relatively healthy. With China’s GDP growth rate settling back to around 7 percent, India is poised to compete with it for the fastest growth rate among large economies in 2015.

The nation’s steel industry grew by 2.3 percent in 2014, producing 83.2 million metric tons of steel—nearly twice as much as Germany and only 5 million metric tons less than the United States.

Indian scrap recyclers and metals producers who gathered for the Metals Recycling Association of India (MRAI) meeting in Mumbai in early February 2015, however, discussed a steel industry that could be running at as low as 50 percent capacity.

MRAI President Ikbal Nathani of Mumbai-based Nathani Industrial Services pointed to a flood of low-priced steel billets pouring into India as a problem on the sales end for Indian steelmakers, while an import duty of from 2.5 to 5 percent causes pain on the operating costs side.

“India is the only country in the world where there is an export duty on scrap and an import duty on scrap,” Nathani said.

India’s import duty has harmed recyclers and steelmakers, he said, “and now China is dumping billets [at] the price of our scrap.”

Speaking to government ministers in attendance, Nathani mentioned that one year ago at another MRAI event, a government spokesperson had promised “that help will be given.” One year later, the import duty still is in place. “Next year this industry will absolutely shut down” if the duty is not repealed, he said.

The U.S. ranked just ahead of India in 2014 steel output. (See the sidebar, “Volume Leaders,” above.) Although the U.S., unlike India, does not share a border with China, steelmakers in the U.S. are just as nervous about a rising tide of imports.

An American Iron and Steel Institute (AISI) news release, citing U.S. Census Bureau data, said the U.S. imported 3.4 million tons of finished steel in January 2015, up 15.9 percent from the previous month.

Those 3.4 million tons represented 32 percent of the market share of finished steel purchased in January. In February 2014, imported steel represented just 24 percent of market share.

The largest amount came not from China but from nations that in previous years likely would have directed more finished steel toward that country, including South Korea (836,000 of that 3.4 million tons) and Japan (211,000 tons). Turkey was second on the list with 275,000 tons, followed by China in fourth with 198,000 tons.

The AISI, based in Washington, says it is working with members of Congress from both parties to pass a currency manipulation bill.

The trade organization refers to currency manipulation a “trade-distorting practice.” AISI President and CEO Thomas J. Gibson, says, “Currency manipulation continues to put U.S. manufacturers, including the U.S. steel industry, at a great disadvantage against our foreign competitors.

“We need the [Obama] administration to insist that our trading partners adhere to their World Trade Organization obligations and hold them accountable when they do not,” he adds. “We, likewise, need Congress to pass strong currency legislation [to] provide domestic industry with a remedy when currency manipulation injures U.S. businesses and their workers.”

The author is editor of Recycling Today and can be contacted at btaylor@gie.net. Portions of this article first appeared in the January/February and March/April issues of Recycling Today Global Edition, a sister publication to Recycling Today.