Some Steel Producers Still Talking About Expansion

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Ferrous Metals, Supply & Demand

Some just find it hard to kick the habit, or maybe a locked mind-set is a better way of describing some steel makers assumptions that they must invest and grow in order to survive. Where did sustainability and efficiency go? We speak here after hearing conflicting speeches at different conferences around the world.

In Sharm El Sheikh Reuters reported on presentations given at the CRU conference first by Anthony De Carvalho, an administrator at the OECD. The global steel industry is running with an overcapacity of 500 million tons and this will continue until 2012 as expansion plans were not adjusted during the market downturn, he said. The capacity has not adjusted and (we are now seeing the effect of ) investment decisions made in previous years when the “prospects for consumption were much stronger.”

Recovery in demand in OECD countries remains rather slow, De Carvalho said. High unemployment, a negative wealth effect on households, will limit their spending on consumer durables. The global steel capacity utilization ratio is expected to recover only partially to 75% in 2012, well below the peak of 85% in 2006, he said, impacting business investment decisions. Business investment is a very strong macroeconomic driver of steel demand and investment is going to remain weak as companies are cautious about the future.

So we have overcapacity and an uncertain future for investment and hence demand.

At the same time, Paulo Rocca, chairman of the World Steel Association said in Mexico City that demand for steel would increase by 11% in 2010 with higher demand in North America driving that rise. In Mexico, only 14 mn tons were produced in 2009 due to the economic crisis and domestic problems, against a domestic production capacity of 22 mn tons. Yet still industry officials are talking of increasing capacity by a further 10 mn tons over the next five years at a cost of some US$10bn. With mills currently running at 75% capacity and nobody  predicting car production, construction or consumer goods sales will get back to pre-crisis levels inside of the next couple of years, if before the middle of the decade, what possible requirement can there be for a further 10 mn tons of capacity? US steel producers need another 10 mn tons of capacity on their NAFTA doorstep like they need a hole in the head.

There is an argument that Mexico is some way between being a developed and an emerging market in that its steel consumption per capita is still some way below the US. However, with several million tons of production capacity currently unused and an economy struggling to recover from a 6.5% contraction in GDP in 2008/9 according to NewsWeek, it is unlikely the country is going to be hitting capacity limits within the next 2-3 years.

Even China is calling for curbs on any further investment in steel production and actively seeking to dissuade banks from lending and steel mills from investing in any further capacity as the country has become a net exporter of steel products from years of being a net importer. The fact is with the exception of India, which will likely double steel production over the next 5-10 years just to keep pace with domestic demand, the world has more than enough steel capacity.

–Stuart Burns

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