core sector communique

The following is a summary of a presentation given in Katowice, Poland, 20th October 2010 by Yasmin Miah and contain the views and forecasts of Metal Bulletin’s research team.

Europe and Steel Raw Materials Markets: Where Next Post-Recession?
Why worry about raw materials?

A year ago caution reigned in the market for 2010. In fact the global economy has shown a faster than expected move towards recovery. This presentation gives an overview of the changes that the raw materials markets have undergone in terms of supply and demand.
Price volatility has returned since the recession which in turn has been passed onto steel producers, shrinking their margins increasingly. Consequently understanding the longer term shifts brought about since the recession in supply and consumption of steel and its raw materials is important to anticipate future challenges and market risks.

Scrap markets

Since global scrap prices plummeted in 2008, we have seen the availability of higher grade scrap in particular dwindle from the developed economies in North America and Europe. At the same time, demand for higher grade scrap from outside of the Americas and Europe increased from Asia. The result has been that domestic buyers in developed economies have been left scrambling for scarcer, and so more expensive, high grade material.

Our outlook is that scrap demand will increase in Europe overall with increasing legislation for moves towards cleaner steel production, and greater levels of scrap EAF production. At the same time, European countries in the central Europe for example who tend to export most of their scrap to European or CIS neighbours, are finding ever more attractive prices to buyers in Asia, and potentially narrowing supplies further in the longer term.

Iron ore

The structure of iron ore pricing has shown the greatest shift since the recession. This has again been driven by shifts in trade patterns. In terms of supply, European iron ore production has been in decline for the last two decades, but saw a further marked decrease in 2009 by some 27% compared to 6.2% in global production falls. Asian steel production saw a 2.6% production growth between 2007 and 2009 driving demand for iron ore, China in particularly accounting for 70% of all world imports.

This resulted in the formulation of quarterly contracts by the Big 3 iron ore miners, increasing their leverage. For the rest of the steel industry, the quarterly pricing model has led to increased price fluctuation, and the tight global supply situation has seen spot iron ore purchases on the up. As a result, a failed attempt at a joint venture between BHP Billiton and Rio Tinto has been viewed with relief by the steel industry, wary of further market domination by the Big 3, who already capture 40% in the steel value chain, while steel producers are limited to around 25% MBR calculates.

With the majority of steel producers in Europe BOF producers, their margins will be progressively more squeezed. Our outlook is that until supplies catch up with demand in the longer term, supplies will remain constrained, leaving prices at their elevated levels.

Coking coal

The coking coal market has been similarly characterised by supply tightness over the last couple of years, even though the material is relatively abundant. China remains the biggest producer, about 50% of world supplies, and the majority of that being held back for domestic consumption which is expected to show a 36% increase between 2010 and 2015. In fact, more coking coal has been sold into the seaborne market from the US, Europe and the CIS, as prices have improved internationally.

The limits to more coking coal coming online then in the next few years will be structural issues. In Europe and the CIS aged capacity is not being replaced as quickly as needed due to financing and environmental legislation burdens. Polish producers who seem to be investing in improving coking coal capacity, which will place them at an advantage compared to other European producers. In developing economies additions to capacity are halted by poor infrastructure. With this in mind, by 2015 supplies will be increasingly fraught.

Conclusion

The summary of this review of supply demand balances in the raw materials markets is that:
• Raw material costs will remain high over the longer term due to supply constraints
• Demand has shifted in favour of Asia when the cost of steel production plummeted in 2008
• The comparatively weak steel demand in Europe and north America, with little prospects of long term drops in production costs, makes these regions increasingly uncompetitive to produce steel

CEE steel producers have an advantage of weaker environmental legislation and cheaper labour costs within the EU trade block, so relocation of high-value steel production to these countries can still be profitable
• Longer term, demand for high-value steel, especially for automotive and white good production, will increase in Asia with their rapid GDP, population and urbanisation growth rates
• With this greater divide between Asian and non-Asian steel consumption, there may be more political trade issues to navigate; current quantitative easing efforts on the part of the USA are a good example

The traditional demand leadership which had been held by developed economies has clearly been eroded then and is now in the hands of Asian consumers. To adapt to this it seems apparent that central European producers will see demands to forge stronger vertical integration in raw materials production. Beyond raw materials, the next challenge for CEE steel producers will be a shift in steel producers moving further up the value chain to export materials to the growing markets in Asia.

Yasmin Miah, Research Analyst
Metal Bulletin Research
ymiah@metalbulletinresearch.com