The steel industry is rather concentrated in structure, with a few producers accounting for the lion’s share of sales. With companies engaged in the extraction of iron ore and coke coal for the processing of iron and steel, this industry includes metal ore exploration and mining services, iron and steel foundries for smelting, rolling, forging, spinning, recycling, stamping, polishing and plating of iron and steel products such as pipes, tubes, wires, springs, rolls and bars.
ArcelorMittal (MT) is the world’s largest steel company, with crude steel production of 73.2 million tons in 2009, representing about 6% of the world’s steel output. ArcelorMittal USA is the largest steel producer in North America and the largest integrated steel producer in the U.S.
The largest drivers of steel consumption have historically been the automotive and construction markets, which absorb more than 50% of total steel production. Large automakers such as General Motors, Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) depend upon the steel industry. Other steel consuming industries include appliances, converters, containers, tin, energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery.
The steel industry has recorded fast growth rates in both production and consumption over the past few years, benefiting from soaring steel demand in the automobile and construction sectors. Moreover, the cost effective and highly efficient steel-making technologies uplifted U.S. steel demand in Middle Eastern and Asian countries.
The Asia-Pacific region, especially China and India, is witnessing higher production and consumption of steel. This is due to the per capita consumption reaching U.S./European levels, which could — theoretically at least — double steel demand in the longer term. China has set up some of the largest steel capacities in the world, driven by an increasing demand for rapid urbanization and large infrastructure projects. The country accounted for nearly 50% of the total world production in 2009.
China’s share is larger than the combined production of the U.S., the European Union (EU), Russia and Japan, which have historically been the largest producers of steel. In 2001, China’s annual share of world production stood at 17%, while the EU accounted for the largest share at 18%. In the eight years since then, China’s share of world production has almost tripled while the other producers have seen their shares decrease. Ranked behind China are Japan and the U.S.
According to the World Steel Association (Worldsteel), global steel output had increased to 109 million tons in the month of January 2010, up 25.5% from January 2009. Month-on-month, steel output improved a modest 2.1% from about 107 million tons. World crude steel production has continued to show a steady increase since April 2009 on the back of a moderate rise in demand and the resumption of idled facilities by producers.
All major steel producing countries — China, Japan, Germany, the U.S., Brazil, Turkey, Russia and the Ukraine — have shown peak monthly figures so far this year.
Year-over-year crude steel production peaked globally in January 2010. Steel production increased 48.8% in North America to 6.1 million tons. In the EU, Germany’s crude steel production was 3.4 million tons (an increase of 27.7%), Spain produced 1.4 million tons (up 51.1%), France’s production was 1.1 million tons (a hike of 32.3%), while Turkey produced 2.1 million tons (a 2% increase).
Monthly steel output in Asia increased 1.2% to over 60 million tons. Of this, the Middle East edged up 5% to 1.4 million tons due to booming infrastructure spending. China climbed 18.2% to 48.7 million tons. Japan produced 8.7 million tons (up 36.8%), South Korea contributed 4.5 million tons (up 32.4%), Brazil’s output was 2.7 million tons (66.6% higher), Russia produced 5.2 million tons (an increase of 33%), Ukraine’s output was 2.7 million tons (28.4% higher) and the Australian production was 0.6 million tons (a 38.6% increase).
OPPORTUNITIES
We expect the global steel demand to improve in the long term with the recovery of the user industries. Growing infrastructure-related outlays as a result of government stimulus measures, including in the U.S., has helped rekindle the demand for steel. Along with government support, the recovering industrial sector is expected to further infuse steel demand, particularly in the U.S.
China is expected to remain the largest consumer of steel going forward. Worldsteel is forecasting an 8.6% year-over-year decline in steel production, better than the previous forecast of a 14.1% decline, driven by strong growth in Chinese demand. With signs of a recovery across the world since the beginning of the second half of 2009, the association is anticipating global steel demand in 2010 to grow 9.2% to 1,206 million tons, which is similar to the level in 2008.
Domestic sheet steel prices have continued their upward trajectory. Relative domestic prices for most steel products increased in February, with the notable exception of beams. U.S. rebar prices are up 11% from January and have posted increases relative to China and Europe where prices have slid modestly lower, and versus Japan where prices are up 8% after falling 6% the month before. Domestic plate prices rose another 7% in February and are up relative to China and Europe where prices are flat.
With steel demand and prices picking up in the last couple of months, steel producers are restarting facilities. Recently, U.S. Steel Corp. (X) — the eighth largest steel producer in the world, the largest integrated steel producer headquartered in North America and one of the largest integrated flat-rolled producers in Central Europe — has restarted its blast furnace at its Hamilton, Ontario plant after a nine-month shutdown.
In response to increased customer order rates, U.S. Steel operated all of its North American blast furnaces in 2009 except the one at Gary Works and the other at its Lake Erie Works due to labor issues. U.S. Steel has also restarted its Keetac iron ore operations.
The current surge in steel demand helped profits of Nucor Corporation (NUE), the largest recycler of steel scrap in the U.S. Nucor returned to profitability in the fourth quarter of 2009 with net earnings of $58.9 million or 18 cents per share, ahead of the Zacks Consensus Estimate.
Overall steel mill utilization increased to 58% from 48% in last year’s comparable quarter. Steel mill utilization rates decreased from 80% in 2008 to 54% in 2009. Long-term contracts, cost reduction efforts and a dominant acquisition strategy inspire optimism about the company’s performance in the coming quarters.
Similarly, commercial metals company AK Steel (AKS) reported earnings of $39.8 million or 36 cents per share in the fourth quarter in contrast to a net loss of $430.6 million or $3.87 per share in the fourth quarter of 2008, driven by higher shipments.
The third largest steel maker in the U.S., Steel Dynamics Inc. (STLD), reported a net income of $26.7 million or 12 cents per share in the last quarter of 2009, after reporting losses in the first two quarters of the year. Earnings were driven by fixed cost reduction through higher production and shipping volumes at the Flat-rolled segment and better-than-expected performance in the Metals Recycling segment.
WEAKNESSES
The global steel industry is cyclical, highly competitive and has historically been characterized by overcapacity. Production cuts of up to 35% are occurring to keep operating rates in the low-80s and balance the market.
The U.S. steel industry is currently facing post-recession effects. The complications started in the second half of 2008 when the U.S. saw a complete failure of its financial market amid the subprime mortgage crisis. Crude steel production dropped around 6.7% in 2008 from the previous year and consumption witnessed a steep decline of 10.6%.
The downtrend continued in 2009, but a recovery is expected in late 2010. The U.S. domestic production capacity utilization has been falling dramatically since August 2008.
Overcapacity in the global steel industry could increase the level of steel imports and result in a downward pressure on steel prices. Overcapacity in China has the potential to result in a further increase in imports of low-priced, unfairly traded steel and steel products to the U.S.
In recent years, capacity growth in China has significantly exceeded the growth in Chinese market demand. A continuation of this unbalanced growth trend or a significant decrease in China’s rate of economic expansion could result in China increasing steel exports.
Key steel consuming industries such as autos, shipbuilding and construction had been experiencing weak demand in the last quarters, forcing global steel makers to slacken production levels. U.S. Steel slashed production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX) cut production by about 15% in December last year. This was the first time in its history that POSCO was forced to take such a measure, proof of the very bad operating environment.
As a whole, the steel industry posted weak results in the fourth quarter of 2009. U.S. Steel recorded its fourth consecutive loss of $267 million or $1.86 per share. By contrast, the company had reported a net income of $2.90 million or $2.50 per share in the corresponding quarter of the previous year.
Allegheny Technologies Incorporated (ATI), one of the largest and most diversified producers of specialty materials in the world, recorded a net income of $37.8 million or 36 cents per share, down significantly from year-over-year net income of $110.9 million or $1.15 per share.
ArcelorMittal expects that the developed world’s demand for steel in 2010 will still fall 23% short of the 2008 level. The company’s tempered outlook is influenced by lingering unemployment and growing government budget deficits.
The still-weak demand from developed nations is the outlook for cost inflation, as the prices for many key inputs (iron ore, metallurgical coal, scrap and natural gas) are either already rising or contracts are expected to be reset at higher levels. In particular, seaborne iron ore benchmark prices seem ripe for an increase.
While demand for steel in China has remained quite strong and that in developed nations has begun to improve, a full global recovery is uncertain and will likely be drawn out.
