WSD Strategic Insights XXXIV: 2014: Adverse outlook for most steel mills

Fixed asset investment stagnating

The steel mills' prospect for 2014 has been deteriorating at an accelerating pace since the fourth quarter of 2013, in WSD's opinion.  Steel demand has been about flat on a year-to-year basis and steelmaking oversupply is substantial.  Hot-rolled band prices have remained depressed on the world market.  Iron ore and coking coal prices are down sharply; although the iron ore price delivered to China has rallied moderately.  More steel plants have been put up for sale.

The fixed asset investment outlook is hard to track precisely.  However, recent events in the Ukraine, along with slow growth rates for many economies, appears to be boosting the odds that contagion - i.e. financial malaise - is spreading sufficiently to slow construction and capital spending in many countries.  And, when economic growth rates are low, non-steel-intensive services, account for a higher share of the overall growth.  Hence, WSD does not see much of a rise in steel demand this year, with demand probably down in the Developing World ex-China.

New global steel trade patterns are emerging in 2014 reflecting: a) the strong U.S. dollar versus many Developing World currencies; b) unsettling political developments in the Middle East, Turkey and, now, Russia/Ukraine; c) regional steel demand shifts; and d) an avalanche of steel trade suits against the Chinese. 

Steel is a late-in-cycle industry.  Even when there's an initial pick-up in the global economy, steel demand may not increase much because it's tied significantly to fixed asset investment (FAI).  FAI typically rises sharply only in the second or third year of an economic recovery; and, then, remains strong for about a year or two when the economy is peaking.

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