Steel industry has ‘annus horribilis’

Overcapacity across the continents, a disturbingly large fall in demand — particularly from Europe which is struggling to recover from the 2008/09 brutal recession — and prices down between 8% and 10% depending on products and markets made 2012 an annus horribilis for the world steel industry, writes Kunal Bose in New Delhi. How bad the year was becomes evident from ArcelorMittal, the world’s largest steel group by a very big margin, piling up a net loss of $4 billion in the last quarter and $3.7 billion for 2012 and China Iron and Steel Association saying that, after tax, profits of the country’s more than 80 steelmakers fell 98.2% to 1.58 billion yuan ($251m). What, however, needs to be factored in for ArcelorMittal working is write-downs of over $5bn, almost all of it on the group’s European operations.

Explaining the reasons for such dismal performance, the India-born ArcelorMittal chairman and CEO Lakshmi Mittal says, “2012 was a very difficult year for the steel industry, particularly in Europe where demand for steel fell a further 8.8%.” The European steel demand is down about 30% since 2007 and analysts don’t rule out possibility of further demand erosion.

Contraction in steel use was inevitable as auto production in the continent has shrunk 20 during the period when there was also considerable shift in consumer durables manufacturing capacity to China mainly and also to some other Asian countries. In the circumstances, ArcelorMittal was not left with an alternative to knifing through some high cost blast furnaces in Europe, where it produces nearly 45% of its steel. The group simultaneously exercised production discipline, resulting in a 2.3% shrinkage in steel shipments to 83.8mt in 2012. Mittal admits to the fact that the industry was taken by surprise by steel market behaviour in Europe and China in particular. Moreover, he says, the industry was found wanting in making adjustments to production quickly enough “leading to oversupply and weak pricing.” Braving union protests and earning displeasure of politicians, some other leading European steel groups like Tata Steel Europe (Corus in its earlier avatar) have also gone through asset optimization programmes principally amounting to capacity resting till improvement in outlook and some selective deletion. Even then, the steel industry is not fully rid of excess capacity. “The industry needs to continue to shrink because there is probably 20% overcapacity,” says Dalton Dwyer, head of London- based merchant banker Industry Corporate Finance.

What are the steel prospects like in the current year? Mittal says “challenges” are to continue largely due to the fragility of the European economy even though the recession bite could become less severe. But unlike in Europe, businesses in the US are getting loans from banks more easily and that will support steel demand growth. He is hoping for a 2% to 3% rise in steel shipments of ArcelorMittal in 2013 on the back of demand improvements in China, Brazil and the US. ArcelorMittal has a strong product portfolio for oil and gas sector and automobile and heavy equipment industries and all of them are expected to fare well in the three markets. What, according to Mittal, should also be supporting an improvement in “profitability of our steel business in 2013” is restructuring in Europe. Because of its overarching presence in Europe and America (both North and South), ArcelorMittal is seen as the bellwether of the steel industry in the west.

What about China which last year raised steel production by 3.1% to 716mt to claim a share of 46.3% of world output of 1.548bn tonnes. China, seen as the growth engine for world steel use, proved to be a disappointment

in rise of metal consumption at only 2.5% (against 6.2% in 2011) to about 640mt. This happened because the Chinese economy grew at its slowest pace in 13 years in 2012 at 7.8%. Besides weaknesses at home, China having emerged virtually as a factory to the world had to bear the brunt of global downturn. What, however, is encouraging is that Beijing could avoid crash landing for the economy belying fears of many at home and abroad.World Steel Association (WSA) said in an outlook report that Beijing stimulus measures are likely to moderately improve the economic situation in 2013 leading to steel demand growth of 3.1%.According to the country’s ministry of industry & information technology (MIIT), China’s steel production and consumption will this year climb to 750mt and 700mt, respectively leaving a surplus of 50mt for exports. It is, however, doubtful if demand growth of this order will lead to any major improvement in profitability of Chinese mills, for there is an overhang of surplus capacity in the country.

Chandra Sekhar Verma, chairman of the Steel Authority of India Limited, a keen observer of China scene says, “expect the country to rid itself of uneconomic and polluting capacity by scrapping blast furnaces of up to 400 cubic metres and electric furnaces of up to 40 tonnes. I will say as China builds new steelmaking capacity of 270mt by 2020, it will at the same time extinguish 60mt of existing capacity to finally have capacity of 1.05bn tonnes.” Parallel to exercising restraint in capacity building, China has set its sights on achieving mastery over making very high grades of steel for which it is now largely import dependent. In this endeavour, it is partnering with leading overseas steelmakers like ArcelorMittal and Nippon Steel, repository of some exclusive technologies, as it is exploring the possibility of employing Corex, Finex and ITmk3 processes at some new mills to be built. In both these pursuits,Verma has put SAIL on the same path as China.

Explaining the compulsions to induct such processes,Verma says, “they allow iron making using iron ore fines, the disposal of which is a perennial issue and non-coking coal of which local deposits are plentiful.” Powdered iron ore is nearly 25% cheaper than pellets. General coal used in a Finex mill costs at least 20% less than high class soft coal. Moreover, the technology dispenses with raw materials preparation stages like

sintering and coke making. “Finex recommends itself for low emissions and economy in construction cost. Moreover, a Finex plant with mini flat mill will need 60% of area of a blast furnace plant of identical capacity. You know how difficult it has become to acquire big parcels of land in India to host new steel mills. That way Finex technology will be of help,” says Verma. SAIL is in talks with Posco, owner of Finex technology, to build a 3mt mill at Bokaro in India using the closely held technology.

Bokaro is where SAIL is expanding crude steel capacity of its mill from 4.38mt to 7mt. Expansion of Bokaro mill is part of SAIL growing crude steel capacity at all its plants to 24.6mt and at the same time modernizing existing facilities from raw materials handling through the entire chain of value addition. “As we complete this phase of expansion cum modernization programme calling for an investment of Rs720bn ($13.1 billion) in another year, SAIL will have all its steel continuously cast, a must for clean steel. Equally importantly, over 70% of SAIL steel in post modernization will be value added. We need volume to maintain our share in the rapidly growing Indian market. Selling large volumes as value added products instead of semi-finished steel will give us better margins. SAIL Vision 2020 programme is designed to lift our capacity to 60 mt and that is to give us a 30% share of the domestic market,” Verma told DCI.

Naveen Jindal, chairman of Jindal Steel & Power, says “steel is a critical metal to help emerging nations to become developed countries.” No doubt China’s might in steel and also in other metals, including aluminium is a critical factor in the country becoming the world’s second largest economy. For Jindal, the fact that India is the world’s fourth largest steel producer and is on the way to figure only next to China will not be distraction from ground reality that “low urbanization is the reason for our steel per capita consumption being only 57kg against world average of 215kg and 460kg in China.” According to McKinsey & Co director Frank Bekaert, residential and commercial buildings, public infrastructure, machinery and transportation account for 75% of steel demand growth in China. In fact, all these sectors plus the pace of urbanization will also be principal drivers of steel demand growth in India. By 2020, China will have steel per capita use of 621kg and India 111kg, says Neil J. Bristow, managing director of H&W Worldwide Consulting. In the last decade and a half, China gave thrust to urbanization and infrastructure development creating ideal condition for rapid steel capacity and use growth.

The Chinese economy will pick up pace in the current year to 8%, if not slightly more, indications of which were available in the final quarter of 2012 when growth picked up to 7.9% on the back of recovery in industrial production and exports. The new Chinese leadership headed by 59-year-old Xi Jinping has not lost time in green lighting infrastructure projects one after another. In an economic slowdown, the government has to take some counter-cyclical measures as part of macro-economic management.

China will continue to have large demand for infrastructure projects, not least due to the emphasis on urbanization. This will sustain demand for steel. No doubt, from here Chinese steel demand, as Bekaert says, will grow at a slower rate than recent history to rise to 820mt by 2020. China having a leviathan like presence in the world steel industry will at all times have a major bearing on the steel market. In this context, Arun Jagatramka, chairman of coking coal and coke producer Gujarat NRE said in his presentation at ‘Global Steel 2013’ conference, “China, as through last year, might have been down, but it was not to be out. On China much will depend as to how prices of steel and minerals like iron ore and metallurgical coal will behave at any point.”

Next to China, the principal growth centre for steel capacity is proving to be India. Its Planning Commission has fixed a target for the industry to commission new capacity of 60mt to take the total to 149mt in the 12th five-year plan period ending March 2017. The 2020 capacity target for India is 200mt. “The roadblocks to building mega steel projects (10mt and more) remain. India accounts for 17% of world population but owns only 2.5% of its land. What follows is the difficulty in acquiring very large tracts of land to house big steel plants. We have plenty of resources like iron ore and thermal coal. But unfortunately, mining here is shrouded in controversy making it difficult to open new mines,” said Jindal at Global Steel conference. To give one example, South Korean Posco, which wants to build a 12mt plant in Orissa has not been able to acquire all the land it needs in the last eight years, thanks to agitation by villagers and protests by NGOs. There, however, is hope. At the initiative of prime minister Dr Manmohan Singh, National Investment Board has been created to come to the rescue of Posco like projects.

While China, India and South Korea in particular in Asia will grow capacity in the years ahead, Europe will go through the inexorable march of capacity contraction. WSA data show steel production in 27 member European Union in 2012 was down 4.7% to 169.4mt and that includes a fall of 3.7% to 42.7mt in Germany, 5.2% to 27.2mt in Italy, a marginal decline of 1.1% to 15.6mt in France and a whopping 12.1% setback to 13.6mt in recession battered Spain. North America, which in the past lost much capacity and went through a great deal of churning in industry, could last year raise production by 2.5% to 121.9mt, of which the share of the US was 88.6mt. This happened because energy cost in the area is comparatively less than in Europe and it also has the benefit of good reserves of metallurgical coal.

Brazilian steel industry optimistic about the future

With imports curbed by the weaker real and spending on infrastructure gathering speed, the Brazilian steel industry looks forward to a much better year, writes Patrick Knight.

Helped by the weaker real, which has made exporting steel to Brazil less attractive, and by a surge in demand for steel from numerous infrastructure projects, Brazil’s mills hope to sell 3mt (million tonnes) or 4mt more on the domestic market this year than in 2012.

The industry used only 70% of its 45.5mt capacity last year, but hopes to push that up to 80% plus this year.

Aided by the devaluation of the Brazilian currency, which fell by 17% against the US dollar during 2012, by numerous anti- dumping measures and the ending of tax cutting by ports anxious to attract import business, Brazil’s steel industry hopes that up to 2mt less steel will be imported this year compared with the 4mt of 2012.

More than $100 billion is to be spent each year on upgrading the country’s creaking infrastructure from now on. Notably, this work will include building or improving up to 10,000km of railway track, upgrading 7,500km of the road network — almost half of which is in a poor or very poor condition — and expansion work at the ports which are struggling to cope with a series of record harvests.

Partly because of this, the steel industry hopes to sell 5–6% more this year than the 25mt used in Brazil in 2012, when the economy hardly grew and manufacturing industry made 2% less goods than in 2011. Not everybody is in favour of the protection Brazil’s steel industry benefits from. The motor industry, set to repeat last year’s output of 3.5 million cars — and which is the leading importer of sheet steel from China, Russia,Taiwan and South Korea — claims that Brazilian steel, which now costs about $1,800 a tonne to make, is amongst the world’s most expensive.

Faced with a flood of imports, and losing export markets, the motor industry has pressed the government to make no more concessions to the steel men.

The government has refused to take more anti-dumping measures. As industry’s profits have not been affected by the extra imports, this seems unlikely to happen.

The steel industry also pressed for the export of scrap, of which the industry uses about 9mt a year, to be halted. But the scrap industry, which claims to export only 300,000 tonnes a year, has fought back strongly and won its case.

INVESTMENTS SHELVED OR SLOWED

Korean Posco and Dongkuk companies adjacent to the port of Suape, in the north eastern state of Ceara, seems to have survived. Vale has, however, slowed expansion work at its Alfa mill at Maraba, on the Carajas railway, where 300,000 tonnes are now made.

The fate of the 5mt-capacity slab ‘South Atlantic’ CSA mill — built at a cost of about $10 billion by the ThyssenKrupp company near Rio de Janeiro and which started up two years ago — is expected to be known soon.

After huge cost overruns, which have severely damaged the German company, the CSA mill, along with a mill in Alabama where 60% of the slabs produced in Brazil are processed, has been put up for sale by ThyssenKrupp.

Although there are several bidders for the mill in the United States, including Arcelor-Mittal and Nucor, only Brazil’s National Steel, CSN company and perhaps Techint, seem interested in the CSA mill.

CSN chief executive Benjamin Steinbruch, who failed to get control of the Usiminas group last year, has sought help from Brazil’s National Development Bank, the BNDES. Steinbruch says CSN is prepared to bid almost US$4 billion for the mills in Brazil and Alabama.

Steinbruch argues that following the takeover of the Tubarao and other companies first by Arcelor then Mittal and the purchase of Usiminas by the mainly Italian owned Techint, Brazil’s steel industry risks falling increasingly into the hands of foreign interests. So it is important that CSA should become Brazilian, he says.

One problem is that Steinbruch has made many enemies as he has consolidated his grip on CSN, Brazil’s oldest mill — not least with the Vale company, which owns 26% of the South Atlantic mill and which also has a contract to supply CSA with all the iron ore it uses.

Like most Brazilian steel companies, which until a few years ago bought most of their ore from Vale, CSN is now not only self-sufficient in ore but — following the development of its Casa da Pedra mine — has become a leading ore exporter as well. Getting full control of the Cas da Pedra mine involved a legal battle with Vale, and CSN is also in dispute with the BNDES.

A few years ago, CSN won the concession to build and operate the 1,500km Transnordestina railway, which will eventually link the Atlantic ports of Pecem and Suape, in Ceara and Pernambuco states, with the north–south line. When the north–south line is complete, it will link Vale’s Carajas line with lines in Minas Gerais, Rio and Sao Paulo states.

The north–south line, on which work first started in 1985, runs southwards through leading soya- and maize-producing areas. The line will soon become a major artery for exports, as well as for goods on their way to and from the free zone at Manaus, on the Amazon river.

It had been hoped that the first stretches of the Transnordestina line would have opened to traffic a year ago. However, difficulties in obtained way leaves from thousands of landowners on its route, as well as problems with the environmental authorities, have delayed construction. This has annoyed politicians anxious to see the soaring cost of getting grains to ports by road reduced, as well as to be present at opening ceremonies in their constituencies.

Despite buoyant sales of cars, as well as consumer durables such as refrigerators and cooking stoves and strong growth by the construction industry, which uses more than 60% of the steel made in Brazil, the average Brazilian still uses only about 135kg of steel a year, compared with the 400kg used by the average Chinese.

The difference is mainly explained by the low spending on infrastructure, which has received less than 1% of Brazil’s GDP in the past few years, compared with several times that in China and India.

Just to maintain what exists, 3% of GDP needs to be spent on infrastructure.

Because so little has been spent for decades, many of Brazil’s outdated roads, railways and ports are gradually deteriorating. With Brazilian industry producing and exporting less every year, but with imports soaring, exports falling and with the economy stagnant, the government has finally decided to take action.

Massive investments in new railways, including a controversial ‘bullet’ train to link Brazil’s two largest cities, Sao Paulo and Rio de Janeiro, are to be made. More than half the 400km of track for this line will be either in tunnels, or on viaducts and bridges, so large amounts of steel will be needed for this project. Other high-speed trains are planned as well.

Work is also well under way on building or re-building a dozen football stadiums which will be needed for the World Cup competition to be held in Brazil next year, as well as for the Olympic Games, to be held in Rio de Janeiro in 2016.

Brazil had a record 84mt crop of soyabeans this year and up to 45mt of that, as well as 20mt of maize and close to 30mt of sugar, will be exported this year, two thirds from Santos, Paranagua and Rio Grande. These exports, plus those of coffee, meat and other farm products, are now responsible for 40% of all Brazil’s export earnings.

But concern is growing that the soaring cost of transport, up by more than 30% this year, means it may not be possible to get all of it, particularly that grown in Mato Grosso state, which is 2,000km from any port, to a ship for below the world price for the commodity.

The loss of competitiveness of some commodities explains the sudden urgency of the road and rail building programmes. These will soon be followed by improvements to waterways, by far the lowest cost of bulk transport. Even when all the new railways are completed, they will not be able to handle all the extra traffic.

There are plans to build 30 locks, most of them alongside existing hydroelectric power stations, or under construction, in the next few years.

With Brazil’s exports of manufactured goods slowing and imports rising, the steel industry complains that the vehicles, construction machinery and consumer goods now imported each year contain 9mt of steel which could be made in Brazil.

In 2012, for example, 800,000 cars were imported, but only 300,000 sold abroad.