What will 2017 bring for the steel industry?
At the beginning of the year, it’s always fun to look forward and pick out some of the themes for the year. 2016 was certainly volatile as hot-rolled coil pricing went from $360 a ton to $600/ton, then back to the low $400s/ton before recovering to $600/ton. Phew!
One big difference in 2017 is that we think there will be a strong upturn in finished flat steel output after production fell in 2016.
In addition to the new capacity at Big River Steel (1.4m tons per year of HRC), which we expect to be operating at 70% capacity utilization by the second half, ArcelorMittal is ramping up its Calvert operation fed by higher output at Indiana Harbor after it restarted its blast furnace there in December and U.S. Steel is restarting its 3.6 million tons per year HRC line at Granite City fed by slab from other locations and may start up at least one of the blast furnaces in half two (not yet confirmed by the company).
Additional HRC from Acero Junction (if it goes ahead with the restart of 1.4m tons per year of capacity) is another possibility. Strong profitability in steel (due to high prices and relatively input prices) should encourage existing mills to maximize output.
The market can absorb higher output despite lackluster demand primarily due to low inventories. In terms of that demand:
- Automotive output is set to peak with little growth expected from 2015/16 sales of 17.4-17.5 million units. It may even slip slightly if higher interest rates hit sales.
- White goods demand is expected to be 1-2% higher with better sales but production volumes hit by the strong dollar.
- Oil and gas tubular will see strong growth from low levels — up as much as 30% year-on-year. We understand that some mills are beginning to return to higher output and add shifts with some oil country tubular goods and small diameter sales now that inventories have been worked through. However due to the 2015/16 slump, this now only accounts for 3-4% of total demand.
- Construction is the trickiest to forecast. Rising interest rates could curb residential expenditure, but this will be offset by high employment. Non-residential demand has been the best performer in 2016 and strong corporate profitability should continue that trend. Public sector expenditure should pick up but the timing may be delayed as infrastructure investment projects may be put on hold pending longer-term plans. Overall, we would suggest that demand growth from this sector could slow to 1-2%, but this has potential to disappoint.
- General industrial output may improve with weaker oil and gas data now out of the year-on-year changes. Consumer-facing industrial equipment should be strong, while mining and construction equipment should begin to pick up after a slow period.
- Overall, we would forecast underlying growth in flat rolled demand in the USA of around 1.5-3%.
Yet we expect output to be significantly higher. This will not impact prices through the first half of the year as inventories are low.
The latest Metals Service Center Institute data highlights that flat-rolled inventories have fallen around 1.1 million tons so far this year, and they are now 2.5 million tons below the 2014 peak. Hot-rolled plate inventories also fell and are 0.8 million tons below peak. However, due to weak shipment data, flat rolled inventories remain at the 8-10 week level with HR plate at around 9-11 weeks i.e. low, but not critical.
Overall flat-rolled inventory (at least the visible stuff) therefore fell in 2016 by around 1.3 million tons or around 2% of the total market. This meant that apparent consumption in 2016 was essentially flat and this was the second successive year of destocking.
Carbon Flat Rolled Inventories
So how about prices?
With scrap likely to move higher in the near term thanks to tight inventories and a positive outlook for steel production as well as potential disruptions to deliveries, we believe that steel mills will look for a further hike as early as early-mid January, although it could be a more conservative $20-30/ton.
Amid low inventories and little import arbitrage in HRC, we expect them to be successful and there could be further price gains out in Q1 and into Q2 with HRC reaching as high as $700/ton. By Q2 however, we expect global raw material prices to be lower as will steel prices and this will allow the return of higher import volumes. In addition, we would expect higher output to begin to have an effect on the market at that point. As a result, we expect prices to come down again and may move back to or even below $500/ton by the end of the year.
Steel-Insight is a steel industry price-forecasting publishing company, based in Toronto. James May, the firm’s managing director, has been a steel industry analyst for 15 years and advises some of the major global steel trading companies, steel producers and steel consumers on the outlook for steel pricing and industry trends. For more information, visit www.steel-insight.com.