Green light ahead for steel?

Green light ahead for steel?

Over 150 professionals related with the steel industry gathered on Monday in Amsterdam for the 53rd IREPAS Meeting / SteelOrbis “Green Light Ahead for Steel?” Fall Conference. The consensus of the participants and speakers was that the current situation of the industry – marked by extreme volatility and seemingly stuck in a downward trend after the earth-shattering year of 2004 – has left many under extreme pressure since every move is a real gamble. What they all wanted to know was whether there would be a green light ahead for steel. Phillip Edmonds, Deputy Chairman of international steel and raw materials trading company Stemcor Europe AG, started the SteelOrbis conference off on an optimistic note for the short term. He indicated that the price of scrap will rebound as Turkish mills begin to return the scrap market in the coming weeks. Furthermore, the rebound in scrap prices will have a trickle down effect on semi-finished and finished steel products, firming up those prices as well in October and November. Offering a longer-term view on the state of steel, Mike Mytton of Global Steel Consultants cautioned that prices would be weak for the next few years. He predicted that prices would fall in 2006-2007, but added that the decrease would not be like the low years of 2000-2003. Mytton pointed out that while the steel industry had become more disciplined, it was still highly scattered and lacking a major market player that could use its influence to bring stability to the industry. The five largest steelmakers account for less than 20 percent of global production. Mytton also emphasized that the steel industry would need to continue thinking of ways to encourage the expansion of steel consumption. One example he gave was lighter automobile frames. He labeled this a ‘defensive’ move by the industry as it sought to stave off competition from alternatives like aluminum and plastic. He also said that the industry should take a proactive stance in educating the public about the usefulness of steel framing in construction projects. Industry lobbying for building codes to be kept up-to-date would be one way to ensure a bright future for steel. SteelOrbis General Manager Murat Eryilmaz then spoke about the outlook for China’s construction steel sector. He began with an overview of China’s sudden rise to global prominence in the steel industry. Then, focusing on China’s future prospects, Eryilmaz emphasized that the current downward market trend in China is unlikely to reverse itself in the short term due to a combination of Beijing’s increased macro-economic control and the seemingly out of control expansion of domestic capacity. In the longer-term, however, China’s steel market will be brisk. The investment rate in the iron and steel industry is decreasing, which means further expansion of the production capacity is likely to be curbed. Lower growth in capacity expansion means that consumption will be afforded an opportunity to catch up, with the result being stronger prices. Furthermore, several key provinces have adopted specific measures to eliminate outdated capacity, and one of the key components of Beijing’s latest industry policy is to encourage consolidation within the domestic industry. This latter point would go a long way towards increasing the global bargaining power of China, which accounts for nearly one-third of global production but has only two steelmakers among the top 20 in the world. Ralph Kredens Leszczynski, a member of shipping company Banchero Costa SpA’s research and ship finance department, talked about the two-way relationship of steel and shipping. He pointed out that the steel industry alone generates nearly 50 percent of all demand for dry bulk shipping. Iron ore alone accounts for half of that demand with 630 million metric tons a year being transported by ship. At the same time, semi-finished and finished steel products account for 216 million metric tons of seaborne trade per annum. Leszczynski said that the last three years have been extremely strong for the freight market. Freight rates for all types of dry bulk ships increased nearly 500 percent over their previous averages. Time charter raters for capsize vessels touched levels as high as $100’000 per day, and voyage rates approached $30/ton in the Tubarao-Rotterdam capsize route. He also drew attention to the fact that the boom came during times of strong fleet expansion. While in most cases, expansion should lead to lower costs as more ships would be available and competition would become more fierce, such was not the case this time. Unexpectedly strong demand from a single country, China, helped balance out the added seaborne capacity. Furthermore, the fact that most of the demand came from one area meant that exceptionally long delays were experienced at Australian and Chinese ports. At one point, almost 20 percent of the capsize fleet was stuck waiting to load or discharge at the ports. Speaking on the future of the freight market, Leszczynski predicted that demand growth was expected to remain strong. While the market would be unlikely to return to the peaks of last year – barring a new shock from China or elsewhere – the current historically high freight rates should continue well into the early months of next year. He conceded, however, that orderbook patterns could suggest a difficult 2006-2007. Oral Draman, head of the Trade Finance Division of GarantiBank International NV, wrapped up the conference by talking about current trends and hot issues in the trade finance markets. Draman emphasized that poor-rich (North-South) trade was no longer dominant. The paradigm for the 21st century would be trade between emerging markets. Instead of trade flowing from China/CIS to Europe/US, we could expect to see trade flowing between China, India, Brazil, CIS, Turkey and the Middle East. Other hot issues for the trade finance market include privatization and nationalization; volatility and supply-demand imbalances; and the relation between the dollar and the euro. Draman emphasized that steel will continue to be ‘sexy’ for trade finance banks. Those banks that can master volatility and the dynamics of emerging markets will be the ones that see the green light ahead.