WSD Strategic Insights CXLVI: Steel industry entering a new era of improved profitability

Monday, 28 June 2021 19:41:15 (GMT+3)   |   San Diego
       

An array of “game changers” seem to be working in the global steel mills’ favor on both a near- and long-term basis.  For example: a) Chinese steel production will likely be constrained for years to come as the government seeks to curb CO2 emissions – hence, we no longer look for surging Chinese steel exports when there’s oversupply for steel in the country; b) non-Chinese steel production will also be restrained given the huge mills’ huge capital expense and rise in operating costs if they are to sharply curb CO2 emissions; c) a number of “legacy” older steel mills are no longer viable on a long-term basis; d) the steel industry’s current “Age of Protectionism,” which benefits home-market prices, is here to stay because government policymakers in a number of countries are not in favor of good profitability for their steel mills (which is essential for their survival); e) many more steel buyers are now “playing defense” because they are apprehensive about sufficient steel production in the years ahead; f) evidence is promising that the global economy will likely expand at a good rate at least well into 2022 – unless there’s a surge in interest rates – which is positive for steel given that it’s a “late-in-cycle” industry; g) we no longer look for surging Chinese steel exports when there’s oversupply for steel in the country; and h) a variety of steel mills in the years ahead will grow stronger via M&A activity.

Given these positives; and, especially, our judgment that the industry has just entered a new “Era of Steel Production Constraint,” WSD is probably more positive on the longer-term profit outlook for many steel companies than in any time in the past.  With respect to prior times:    

  • From the late 1940s through 1959, the global industry was in a favorable profit situation, when global steel production rose about 9% per annum.  During much of this period, steel was in short supply.  This era ended in 1959, with the 119-day industry-wide steel strike in the United States that provided many foreign mills with a new position in the USA steel market.  During these years, based on the Bretton Woods Agreement in 1944, that was attended by most countries apart from those at war with the United States, the USA agreed to be fully open to merchandise produced abroad as long as it remained, in effect, remained the enforcer of the international finance system. 
  • During the 1960s to the mid-1970s, the Japanese steel mills became a serious threat to steelmakers elsewhere as they: a) added many steel plants with the most modern equipment; b) benefitted from low prices for iron ore and coking coal on the world market; c) enjoyed a highly positive government policy towards the industry (Japan Inc.); and d) benefitted from a lengthy period in which the Japanese yen was fixed in value versus the U.S. dollar – and, as a result, the country’s trade surpluses piled up.
  • During the period from the mid-1970s to the late 1990s, underlying steel demand grew only slightly as the Soviet Union collapsed (including huge downsizing of its steel industry), global steel trade soared, sharply higher obsolete steel scrap generation benefited EAF-based steelmakers (that were using new technologies and cheap steel scrap prices to take markets away from the integrated mills).   An important event during this period was the Plaza Accord meeting at the Plaza Hotel in 1985 among G-5 nations in which the Japanese negotiators agreed for their currency to appreciate versus the U.S. dollar (which happened and, within about two years, the Japanese huge trade surpluses was largely eliminated). 
  • During the period 2000 to 2020, there was: a) massive Chinese economic and steel production growth; b) the huge expansion of global steel trade; c) expanding steel industry protectionism; and d) world steel export prices often declined when Chinese steel mill exports were surging.  During these years, some of the best performing mills included:  a) USA electric arc furnace based mini-sheet mills making use of revolutionary thin-slab casters; and b) leading Russian mills with their own iron ore and coking coal mines.

 

 

 

 

 

 

 

 

 

 

 

 

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.

The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any action is neither authorized nor warranted.  WSD does not solicit, and avoids receiving, non -public material information from its clients and contacts in the course of its business.  The information that we publish in our reports and communicate to our clients is not based on material non-public information.

The officers, directors, employees or stockholders of World Steel Dynamics Inc. do not directly or indirectly hold securities of, or that are related to, one or more of the companies that are referred to herein.  World Steel Dynamics Inc. may act as a consultant to, and/or sell its subscription services to, one or more of the companies mentioned in this report.

Copyright 2021 by World Steel Dynamics Inc. all rights reserved


Tags: China Far East 

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