The U.S. houses one of the world’s largest steel industries. It is rather concentrated in structure, with a few producers accounting for the lion’s share of sales. If we add companies engaged in the extraction of iron ore and coking 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 steel output.
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 (MTLQQ), Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) depend upon the steel industry. Other steel consuming industries include appliances; agricultural; converters; containers; domestic and commercial equipment; energy; electrical equipment; and industrial machinery.
Production
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 work at idled facilities. All major steel producing countries — Brazil, China, Germany, Japan, the U.S., Turkey, Russia and the Ukraine — have shown peak monthly figures so far this year. According to the World Steel Association (WSA, or worldsteel), global steel output increased to 122 million tons in the month of April 2010, up 35.7% from April 2009. However, month over month, steel output declined by less than 1% from about 122.2 million tons.
Year-over-year crude steel production peaked globally in April 2010. Steel production increased 79.4% in the U.S. to 6.8 million tons. In the European Union (EU), Germany’s crude steel production was 3.9 million tons (an increase of 107.2%), Spain produced 1.6 million tons (up 36%), Italy’s production was 2.4 million tons (a hike of 57.9%), while Turkey produced 2.4 million tons (a 21.5% increase).
Total monthly steel output in Asia (China, India, Japan, South Korea and Taiwan) remained nearly flat at 77 million tons. In China, steel production stayed the same at 55 million tons. Japan produced 9 million tons (down 4%) and South Korea contributed 4.8 million tons (up 1%). Steel production in the Middle East edged up 9% to 1.7 million tons due to booming infrastructure spending.
Growth Trends
The steel industry recorded high growth rates in both production and consumption over the past few years, benefiting from the soaring steel demand in the automobile and construction sectors before the recession hit. Moreover, cost effective and highly efficient steel-making technologies have lifted the demand for US steel in the 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 in these countries reaching U.S./European levels, which could — theoretically, at least — double steel demand in the longer term. China’s share of steel is larger than the combined production of the U.S., the 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. China has set up some of the largest steel manufacturing facilities 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. Ranked behind China are India, Japan and the U.S.
In 2007, China’s steel industry revealed signs of consolidation in a market that was previously rather fragmented and in need of mergers and acquisitions (M&A). Despite the current slowdown in consolidation within the global steel industry, M&A activity remains a critically important business strategy.
OPPORTUNITIES
Given its economic sensitivity, we expect global steel demand to improve in the long term with the recovery in the user industries. According to worldsteel, steel demand in the U.S. was down 41.6% in 2009 at 57.4 million tons. However, with the economy in recovery mode, the industrial sector is expected to drive a 26.5% increase steel demand in the U.S. in 2010.
Steel consumption in China accounted for 48.4% of world steel output in 2009. China is expected to remain the largest consumer of steel going forward. Worldsteel expects global steel demand to improve a further 5.3% to 1,306 million tons in 2011, driven by a strong growth in demand. Chinese steel consumption is expected to increase 6.7% to 579 million tons in 2010, after an impressive increase of 24.8% in 2009. For 2010, worldsteel is forecasting total steel consumption to increase 10.7% year over year to 1,241 million tons in 2010, against a 6.7% decline last year.
Worldsteel expects steel demand in India to grow 13.9% and 13.7% in 2010 and 2011, respectively, after a gain of 7.7% in 2009. The EU experienced a 35.2% decline in steel demand in 2009, with Spain and Italy the hardest hit by the collapse of their construction sectors. According to worldsteel, in 2010, the region will see an increase of 13.7% in steel demand due to inventory rebuilding and a slight increase in real steel use. Japan would see steel consumption rising 10.3% in 2010 after a 31.7% fall in 2009.
Steel prices gradually started to recover since the third quarter of 2009 due to increases in demand, higher levels of economic activity and falling inventories. Steel prices had collapsed in late 2008 and continued to decline during the first half of 2009.
The current surge in steel demand has helped the earnings of Nucor Corporation (NUE), the largest recycler of steel scrap in the U.S. Nucor returned to profitability in the last quarter of 2009. The company started 2010 with first quarter earnings of $31 million or 10 cents per share.
Similarly, commercial metals company AK Steel (AKS) swung to a net income of $1.9 million from a net loss of $73.4 million in the year-ago quarter, driven by higher shipments.
One of the largest and most diversified producers of specialty materials in the world, Allegheny Technologies Incorporated (ATI) recorded net income of $18.2 million or 18 cents per share, up significantly from a year-over-year net income of $5.9 million or 6 cents per share.
The third-largest steel maker in the U.S., Steel Dynamics Inc. (STLD), posted first-quarter results that beat analysts’ estimates on higher shipping volumes and prices.
WEAKNESSES
The global steel industry is capital intensive, cyclical, highly competitive and has historically been characterized by overcapacity. More-than-sufficient stockpiles have been weighing steel prices, a situation further complicated by the domestic steel consumers, who are importing relatively cheaper steel from China. This pressurizes steel prices even further. Concerns about the sustainability of economic recovery and question marks about China’s growth momentum also come into play in the pricing equation.
Key steel consuming industries such as auto, shipbuilding and construction have been experiencing weak demand in the last few quarters, forcing global steel makers to slacken production levels. Production cuts of up to 35% are occurring to keep operating rates in the low-80s (capacity utilization rates) to adequately balance the market.
United Steel Corporation (X) slashed production by almost 62% during 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 adopt such a measure, proof of the very bad operating environment. In the U.S., industry capacity utilization level was 61.5% in 2009, below levels of near 90% during mid 2008. However, the global crude steel capacity utilization ratio in April 2010 was 83.4%, up 18.9% from April 2009.
Rising raw material (iron ore and metallurgical coal) prices in the steel industry remain another major concern for the steel producers. The iron ore industry is highly concentrated, with only three major players — VALE (VALE), Rio Tinto (RTP) and BHP Billiton (BHP) — enjoying substantial pricing power. This may weigh on steel producers’ margins going forward.
Steel demand in the emerging markets outside China is expected to grow strongly in 2010. In China, the government’s expansionary economic policies, easy credit and construction initiatives have thus far sustained demand. But with China attempting to rein in its overheated property sector and engineer a soft landing for its economy, steel demand will most likely soften noticeably in the coming months. This relatively uncertain China outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.Zacks Investment Research
