Steel Prices / Market Analyses

Far east concerns

SteelOrbis Americas’ Mexican correspondent explores how increased steel imports from China are affecting the Latin American steel industry.

While the Chinese iron and steel industry “has entered a figurative winter,” according to Yang Siming, president and CEO of Nanjing Iron and Steel Group, the steel industry in Latin America has hit roadblocks of its own by increasing indirect steel imports from the far east.

Efforts to combat pollution in China have led to the closure of some of the world’s largest steel manufacturers, where production reached a record 779 million tons in 2013. Nevertheless, major Chinese steel producer Baosteel reportedly predicted that the total production of crude steel in China will rise by 3.8 percent in 2014 to 809 million tons.

The Asian giant is also facing a credit squeeze that has resulted in a cost increase of 22 percent for steel producers in the first quarter compared to last year, according to the China Steel Association.

But the Latin America region, which has long aspired to be fully industrialized, resents the explosive growth of the Chinese economy.

The Latin America region, which has long aspired to be fully industrialized, resents the explosive growth of the Chinese economy.

According to the recent study by the Latin American Steel Association (Alacero), “Indirect steel trade in Latin America is a political uncertainty, leading to repeated economic crises, the lack of effective trade integration agreements, and social conflicts that do not allow for the emergence a solid production structure that is able to face global competition.”

However, the association added, some countries in the region such as Mexico, Brazil and Argentina have developed relatively large industrial parks, highlighting the automotive sector as the main manufacturing activity in the region and increasing the demand for steel, particularly flat products.

In general, Latin America is a net importer of goods and indirect steel trade has grown over time, increasing purchasing power, which can be approximated by the GDP.

There are intra- and extra-regional trade relations that are key to understanding how manufacturing activity in Latin America works and identifying strategic weaknesses, such as the absence of an industry or the displacement of the other regional partner from overseas, as could be the case in China.

Imports from this country do not follow changes in regional demand, according to the study, but are the result of unfair trade practices also displace other regional and world trading partners.

Imports from China do not follow changes in regional demand, according to the study, but are the result of unfair trade practices.

In this sense, Alacero’s 2011 study on the “Development of Metalworking Value Chain”, which mentioned steel trade flows between China and Latin America and how the growing deficit was unidirectional indicates that this trend has grown steadily during this decade.

Latin America has been a net importer of manufactured goods with high steel content in the last 10 years, marked by a severe impairment in the trade deficit from 2004 on.

Between 2000 and 2010 imports were multiplied by 2.3 while exports were slightly less dynamic, with a multiplier of 1.9. During the global crisis of 2009, both imports and exports experienced a drop of 22 percent and 24 percent respectively.

In 2010 trade values ​​ranged over those of 2008, setting a maximum of US$160.7 million in the case of exports and amounting to US$231.9 million for imports. With this, the trade deficit of 2010 reached the highest level of the decade, with a value of $US71.19 million.

Indirect steel imports in Latin America showed a slight trend toward greater diversification. The automotive sector accounted for 39 percent of the flow in 2000 and 35 percent in 2010.

The other sectors saw their weight slightly decrease or stay level over the decade, with the exception of the mechanical machinery sector, which rose from 21 percent of imports in 2000 to 26 percent in 2010.

The automotive sector is still the most signficant to the steel industry in Latin America, followed by mechanical machinery and metal products, with 26 percent and 30 percent, respectively, in 2010.These two sectors are related to two of the most important economic activities in the region: agriculture and mining.

The automotive sector is still the most signficant to the steel industry in Latin America, followed by mechanical machinery and metal products.

In the first decade of this century, steel imports in the automotive sector increased by 1.6 percent, from 4.1 million tons in 2000 to 6.5 million tons in 2010.

“After a downturn in 2002 as a result of the crisis that hit the region, there was a sharp increase in imports of cars, hand-in-hand with the economic boom Latin America experienced until 2008,” said the analysis.

While volumes fell sharply in 2009, with a contraction of 32 percent comparable to earlier levels, imports in 2010 and slightly exceeded the pre-crisis volumes. In total, vehicle imports grew at an average of 7 percent annually between 2000 and 2010, slightly lower than the increase in exports, which had an annual increase average of 8 percent.

The scenarios for the next two years differ from country to country. In some areas, they will be less favorable and marked by inflation and stagflation, falling prices of commodities, fiscal restraint and contraction of private investment. In other countries, the outlook is more encouraging for infrastructure investment and the recovery of steel consuming markets.

In line with the GDP and industry, the major steel consuming sectors showed moderate expansion in 2013. Construction (47 percent of steel consumption in the region) grew only 1.4 percent. The automotive sector expanded 7.1 percent. Meanwhile, the metal products sector fell 1.8 percent in 2013. In 2014 and 2015, these scenarios will improve due to the recovery in the production of metal products and some growth in the automotive sector and construction.

Thus, in 2013 the apparent consumption of steel managed to not grow versus 2012 and showed different results by country: Brazil expanded 4.8 percent and Argentina by 2.8 percent; Mexico closed the year by decreasing consumption by 8 percent; Chile and Venezuela saw declines of 11.9 percent and 5.3 percent, respectively; Colombia consumption grew only 1.1 percent; and Peru grew 7 percent. However, Latin American expectations for the current year are encouraging, with growth of 4.5 percent for the overall region, with continual expansion of 3.1 percent in 2015.

One issue that occupies the industry and its value chain is the marked growth in Latin America as a destination for exports of steel and steel-containing products from China, many of them in unfair trading conditions, a concern that has been extended to Turkey.

Latin America accounts for just under 5 percent of global consumption of flat rolled steel (almost 67 million tons per year). However, in 2013 it accounted for 9 percent of total exports from Turkey and 10 percent from China. Alacero has been monitoring trade between Latin America and China regarding raw materials and indirect steel trade for several years, and recently started looking into trade with Turkey.

The association’s report shows that in 2013, Turkey exported 1.26 million tons of steel to the region, concentrated in long products for construction, comprising 20 percent of imports of all long products to the region.

The case of China is much more serious. In the last six years, between 2008 and 2013, Chinese exports of galvanized products grew only 5.2 percent, from 51.4 million tons to 54.1 million. However, in the same period, Chinese exports of these products to Latin America more than doubled in volume: increasing from 2.6 million tons in 2008 to 5.7 million tons in 2013.

Alacero’s board reinforced the need to continue monitoring antidumping safeguards in the region, and to work with its partners with information on the actions taken by each country. The association aims to be a communicating vessel between similar associations, as the call for strengthening the governments in the region to address unfair trade.

Martin Berardi, President of Alacero, was clear about the role of the association: “Alacero must further deepen its efforts to inform the public of the damage that the arrival of products at subsidized and unfair conditions—especially from China—brings to Latin America in terms of jobs, tax revenue decline, disincentive to investment and long-term economic sustainability.”

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