Steel companies urgently need to improve market demand

Global steel producers have benefited from a sharp decline in iron ore and coking coal prices, but they still face weak downstream demand, especially in manufacturing.

Since the beginning of this year, iron ore prices have risen by more than 70% due to supply shortages in Brazil and Australia, and steel companies have been hit hard – but almost as suddenly, prices have plummeted by 30% since the end of July.

The S&P global Platts 62% grade powder ore benchmark price reached a five-year high of $126.35/tonne CFR on July 3, but has now fallen back below $90/ton.

Usually, iron ore entering the blast furnace is purchased by steel companies 3-4 weeks ago. As steel companies begin to use lower-priced iron ore, profits should start to improve in September, but improvements will be seen mainly in the fourth quarter.

High iron ore prices and economic challenges have caused steel companies to decline in performance. Affected by weak steel profits and macroeconomic factors, Australia’s BlueScope Steel’s July-December earnings fell 45%. The group produces steel in the US and Australia and also operates in China. Thyssenkrupp, a European conglomerate, talked about the harsh environment facing the European steel sector this month and lowered its forecast for the 2018/2019 fiscal year.

Shanghai Baosteel’s net profit for the first six months of the year fell by 38% year-on-year due to the squeeze on steel profit margin.

Iron ore exports from Brazil and Australia have begun to recover, but according to S&P Global Platts estimates, the shipping supply gap will reach 50 million tons this year. For steel companies, what needs to be improved is the demand side of the market. In most major markets, the construction and infrastructure industries are in a fairly robust state.

Manufacturing waits for a rebound

On the other hand, manufacturing is not so strong. Consumers are less likely to buy cars and refrigerators than ever before, and manufacturers are reluctant to invest in new equipment in the face of uncertain economic prospects.

From January to July this year, China’s rebar production increased by 21% year-on-year, while HRC production increased by 12%, which proved that manufacturing demand was weak. According to Platts data, the profit margin of rebar during the above period was US$67/ton, while the profit margin of hot rolled coil was US$38/ton.

Shaun Roache, chief economist for S&P Global Asia Pacific, said global trade tensions are having a negative impact on manufacturing investment decisions. He said that trade-dependent Asian countries such as South Korea, Malaysia, Singapore and Thailand were particularly hard hit, with manufacturing investment levels hitting a seven-year low in these countries. Roache said: “We are beginning to see some worrying initial signs that investment in the manufacturing sector, which is affected by import tariffs, is slowing.”

BHP Billiton (BHP), the world’s third-largest iron ore producer after Vale and Rio Tinto, said in August: “Unpredictable policies, trade instability and global growth slowdown have been Weaken confidence and affect the commodity market.”

BHP Billiton CEO Andrew Mackenzie warned: “The further escalation of trade protection or the loss of business confidence is a downside risk to the world economic consensus.”

Looking ahead to the recent steel market, the United States and Europe have remained sluggish due to summer holidays, while China and other Asian countries are in the off-season due to hot weather. As construction activity resumes, demand should begin to improve in September.

In China, there are usually some steel and raw material procurement activities on the eve of the National Day holiday. The supply and demand situation in the rest of 2019 seems to be relatively balanced, and steel prices should remain stable.

Post time: Sep-04-2019
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