Commodities | Nov 10 2011
– Chinese steel demand softening shorter-term
– Long-term outlook remains positive
– Steel margins should also climb from current levels
By Chris Shaw
A recent softening in Chinese steel demand can be put down to three factors in the view of ANZ Banking Group. These are that the construction sector is now seeing the impact of policy tightening measures; that the ousting of a minister earlier this year has impacted on transport infrastructure development; and that auto sector demand has started to show signs of slowing following two years of double-digit growth.
Despite this shorter-term weakening in demand, ANZ suggests the long-term outlook remains upbeat. As evidence, the bank notes a new Five-Year Plan is forecasting steel consumption in China will peak at 770-820 million tonnes per year in 2015-2020. This compares to output of 630 million tonnes in 2010.
Further consolidation in the steel industry in China should help in this regard, ANZ noting the target is to increase the output construction ratio for the top 10 mills to 60% by 2015, up from 48.6% in 2010. This consolidation should help reduce both energy intensity and carbon dioxide emissions and is likely to result in small smelters being closed.
Another goal is to improve the quality of steel products made in China. At present, ANZ estimates around 70% of Chinese-made steel products fall below international standards.
Citi also expects relatively weak steel demand from China in the shorter-term, forecasting sub-GDP demand growth in 2012 and a stagnating in per capital steel consumption. This should generate higher exports from China into regions where countervailing duties are not in place.
European steel demand is also expected to be weaker in coming months, but Citi expects this to be at least partially offset by US demand that has surprised on the upside and improving demand from emerging market nations such as India.
Taking a medium-term approach, Citi sees this as supporting a tightening in steel markets in 2013 and 2014. In part this will be because private sector balance sheets are not strong enough to sanction new projects and returns are still well below the cost of capital.
For Citi, while 2012 is likely to be a weak year for steel mills, the potential for a significant increase in iron ore supply relative to steel supply from 2013 supports the expectation of an improvement in steel margins in coming years.
Citi suggests the dollar conversion margin in steel is a more important indicator than the steel price itself. Lower raw material prices will likely only come through in the first quarter of next year, with potential for conversion margins in 1Q12 to improve by as much as 15% from the lows expected in coming weeks.
With respect to China, Citi suggests the start of a shift in GDP factors towards consumption, coupled with China's relatively high per capita steel consumption levels when compared to GDP per capita, raises the question of whether the market is entering a period of lower per capita steel consumption.
Given such a backdrop Citi expects the global steel market will remain over-supplied in 2012, before slowing capacity growth creates a stronger steel market and improved margins in both 2013 and 2014.
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