Will well-positioned steel mills turn in good profits during 2024-2030?
WSD thinks that the answer to this question is “most likely yes.” The reason for the improved profits looking out to 2030, if this occurs, is likely not rising global steel demand. In fact, global production will likely be little changed in 2030 versus 2023 if the decline in Chinese steel demand, reflecting the country’s reduced steel intensity, is only about offset by rising demand elsewhere in the world – primarily India and other Southeast Asian countries.
The key development is the continued shift in the steel industry’s “industrial structure,” reflecting some of the items discussed below.
Some positives for 2024-2025:
- Steel’s “Age of Protectionism” has been in effect since the third quarter of 2016. It is showing no signs of ending. In fact, it is now morphing into the steel “Age of Carbon Protectionism” as countries seeking to reduce steel industry CO2 emissions are in the process of forming a “club” and implementing various “CBAMs” (Carbon Border Adjustment Mechanisms). Hence, home-country prices in a rising number of countries will remain well above export prices, FOB the port of export, because of new import restraints.
- Likely good non-Chinese global economic growth. Benefits for the non-Chinese economy are expected to include: a) the re-direction of manufacturing investment from Chinese to other Developing and Developed countries due to the recent acceleration of geopolitical strife between China and its Western trading partners; b) the likely return of relatively low interest and inflation rates in the years ahead; c) growth in investment in “green” energy and industrial infrastructure, including the steel industry; and d) no regional financial crisis that threatens the global financial system.
Fixed asset investment as a share of GDP is forecast to be rising outside of China – which is a critical positive according to the Capital Fundamentalism economic theory. We see three reasons for this development:
- Investments in machines powered by artificial intelligence that replace workers. In effect, capital is replacing labor.
- Rising fixed asset investment in a number of countries in order to promote job creation and offset the impact of what’s discussed just above. Job losses are inevitable due to rising use of artificial intelligence.
- High returns on investment because of the continued advance of the Information and Technological Revolutions. We look for “social capital” in many countries to be rising. “Social capital” is defined as the predisposition of a country to enjoy sizable multipliers when capital is invested. Looking back to the post-World War II period, “social capital” in Western Europe and Japan was so high that relatively moderate inflows of capital produced huge economic expansions.
- M&A activity will continue to create more concentration in home-country steel markets. The more the concentration, the greater the likelihood that the steel mills will have the “pricing power” to pass on their costs.
- Chinese steel exports will probably have a less devastating impact on the world export market than was the case at times in the past. Although, looking ahead, the Chinese mills at times will seek to sharply boost exports, as is the situation at present. Developments restraining the Chinese mills’ steel product exports are expected to include:
- Trade suits are now imbedded so substantially into the global steel trading system that they are limiting the Chinese mills’ exporting capability. Price competition will often be the most intense in non-restricted markets in Southeast Asia.
- Capacity reductions. WSD expects that Chinese municipalities and the Central Government will help the Chinese mills to reduce capacity once it’s apparent that demand is in structural decline. There will be more consolidations and plant eliminations.
- Governmental actions to limit the mills’ exports in order to lessen air pollution and reduce CO2 emissions.
5. International iron ore and coking coal prices will be reduced reflecting rising capacity and stagnating demand. Iron ore in Fair to Good Times for the steel industry might sell for $75 per tonne, delivered to China. Coking coal, FOB Australia, might be priced at $190 per tonne, FOB Australia. Hence, inflation in integrated steelmakers’ costs may be nil – permitting steel products to compete successfully against other materials. Overall, WSD expects that “economic rent” will shift somewhat to the steel mills and away from their raw material suppliers.
6. Steelmaking and rolling mill capacity reductions and consolidations will accelerate during periods of sharply reduced steel prices. The announced capacity reductions by major Japanese producers in recent years are an example. Hence, despite current sizable capacity additions, long-term endemic oversupply for steel will be avoided. The steel industry is simply too capital intensive for the mills to maintain substantial unused facilities in a ready-to-operate condition. This development will be especially pronounced in China.
This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.
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