Steel output up but price pressures build

LONDON: Global steel production edged up to a new all-time high of 1.562 billion tons annualized in April, according to the latest estimate from the World Steel Association (WSA).
But momentum is fading.
April’s year-on-year growth rate was a meager 1.2 percent and cumulative growth over the first four months of this year was just 0.8 percent, compared with 7 percent last year and 15 percent in 2010.
Moreover, steel prices just about everywhere are falling, a sign of spreading demand weakness and a warning that current production rates are unsustainable beyond the very short term.
Nowhere is the disconnect between production and price so stark as in China.
National production hit a fresh annualized high of 737 million tons in April and the higher-frequency data provided by the China Iron and Steel Association (CISA) suggest run-rates only accelerated further in the first part of this month. Yet Shanghai steel futures have been sliding since mid-April, the downtrend accelerating over the last 24 hours. The most active rebar contract on the Shanghai Futures Exchange slumped more than 2 percent to a seven-month low today.
Rebar steel is used in the construction sector and the Shanghai contract’s precipitous slide is signalling weakness in what has been one of the pillars of Chinese steel demand.
Falling property prices may be a sign that the government’s engineered cooling of the residential construction sector is working.
But the by-product has been a sharp slowdown in new construction activity.
Real estate investment growth fell to 19 percent in April from 28 percent in January-February. Analysts at China International Capital Corp. estimate floor space under construction slumped 60 percent in March.
Against such a backdrop in such a key demand sector, Chinese steel production strength has simply fed accumulating inventories and accelerating exports.
Steel mills are operating at compressed margins, if they’re achieving any margins at all.
Some sort of domestic market rebalancing looks overdue and the first tangible sign of pending reconnect between price and output may be the sliding iron ore price as Chinese mills defer raw material cargoes.
Since China has been the single-biggest driver of global steel production growth this year, the impact of an overdue slowdown in the country’s run-rate is hard to overstate.
Production in the world outside of China was flat in April and marginally lower year-on-year in the first four months of the year.
That, though, masks very divergent production trends.
The stand-out performer so far this year has been North America, and the US in particular, where annualized steel production in April of 94 million tons was the highest since September 2008.
Rising production has reflected robust demand from the automotive industry and from niche markets such as tube for the oil and gas sector.
But here too, there is a growing disconnect between production and price.
Hot-rolled coil prices, as assessed by The Steel Index, peaked above $700 per ton in January and have been softening ever since to a current $652.
Moreover, the relationship between steel prices and the purchasing managers index has broken down in the last month or so, with the former falling and the latter still rising.
This pricing tension is signaling oversupply, a combination of strong domestic production and higher imports, even in what has so far been the strongest regional steel market.
And, in more muted form than in China, it also suggests some sort of rebalancing between local supply and demand is pending.
That rebalancing is already taking place in Europe and the result is a steady slowing of steel run-rates.
Year-on-year growth in April was negative at 5.2 percent in the EU-27 region, extending a trend that dates back to October of last year.
What is noticeable in the latest WSA figures is the spread of production weakness across the continent.
Previous stand-outs such as Italy and France last month joined the list of countries with negative steel output growth.
Moreover, the trend of softening production is spreading to both CIS countries, where output fell by 5 percent in April, and to Turkey, where production growth has braked sharply from 14 percent in January to 5 percent in April.
Here the core price weakness is emanating from the Black Sea billet market, reflecting an absence of anticipated demand from the Middle East construction sector.
Steel production is a lagging indicator of the state of the global manufacturing economy.
April’s record output, therefore, says much about market expectations a few months ago.
Chinese steel mills were confident that it would be “business as usual” in the country’s giant construction sector after the New Year holidays.
North American mills were capitalising on higher prices predicated on unexpectedly strong demand for their products.
And even in Europe the bigger steel-producing nations such as Germany, Italy and France were still riding buoyant export markets and steady if unexciting domestic demand.
Today recession in the euro zone is starting to look like a best-case scenario, relative to the likely fall-out from a Greek exit.
North American mills are now starting to feel the pinch from sliding steel prices.
And Chinese mills have started canceling and deferring iron ore contracts, a sure sign of margin distress and a problematic outlook.
Steel prices are now reflecting this collective shift in market dynamics.
It’s only a matter of time before production also readjusts.
— Andy Home is a Reuters columnist. The opinions expressed are his own.