We have reached the half way point in 2017 and I think it is an appropriate time to take stock of the significant developments in the steel industry thus far this year.
Developments in China continue to hold sway over global steel market dynamics. While Chinese steel prices remain volatile, the general trend is that they have managed to sustain at levels that enable steel mills in China, and also elsewhere, to enjoy reasonably healthy profit margins. Chinese steel mills now have less incentive to seek high export volumes when domestic demand and prices are more attractive. As a result, China’s steel export for the first five months of this year dropped 25.7% year-on-year to 34.19 million tonnes (total volume of China’s steel export in 2016 was 108.43 million tonnes).
The continued efforts by the Chinese government to push for elimination of excess steel production capacity in the country have also helped to improve market sentiments. In 2016, China succeeded in eliminating a total of 85 million tonnes of steel production capacity, above its set target cuts of 45 million tonnes for the year. However, most of the eliminated capacity was already closed down or idle and the actual operating capacity shut down was only 23 million tonnes. For 2017, the government has set the target of reducing an additional 50 million tonnes of crude steel capacity. This is in addition to the closure of obsolete grades of rebar capacities, mainly from induction furnaces, by the end of June 2017.
According to China Iron & Steel Association (CISA), China has over 500 induction furnace steel producers nationwide, with combined capacity of 119 million tonnes per annum. As the main raw material of the induction furnaces is ferrous scrap, the clampdown on the induction furnace steel producers has led to an oversupply of ferrous scrap in the Chinese market. Prices of ferrous scrap in China started to drop and there was a sudden surge in export of the material from China, despite a 40% export duty. Nevertheless, China is not expected to be a significant player in ferrous scrap export in the immediate future. However, some quarters are of the view that China could become a force in the international scrap market from around 2020 when its myriad appliances, cars and industrial goods made during the economic boom period reach the end of their useful lives and start to be recycled.
The above developments are a welcome relief for the long suffering steel producers in ASEAN, which have, in recent years, been adversely impacted by the influx of low-priced steel exports from China. Additionally, the possible emergence of China as a significant exporter of ferrous scrap in the future could bode well for the steelmakers in the region as most of them operate EAF facilities in which scrap is the main feed material.
Outside China, one evolving development that has attracted rapt attention of the steel fraternity throughout the globe is the decision by the Trump administration to invoke Section 232 of the Trade Expansion Act of 1962 to investigate the impact of imported steel on U.S. national security. The result could be the imposition of new tariffs or quotas beyond the current anti-dumping and safeguard duties. A major concern is that the action might lead to a new round of trade war among the major steel trading nations. As it is, the European Commission has already been reported to be considering introducing its own safeguard measures against steel imports to counteract a potential influx if the U.S. introduces its Section 232 order.
Another notable development is the rise of Iran’s steel industry on the world scene. The country is now the second largest steel producer in the Middle East, after Turkey. It has lately also emerged as a significant steel exporter, especially in Europe, where it has become the third largest exporter to the continent in 2016, after China and India. Iran also has an ambitious plan to increase its steel production to 55 million tonnes per year from the current level of roughly 18 million tonnes per year by 2025. By that time, it hopes to be able to export 20 to 25 million tonnes of steel products annually. For ASEAN, Iran is a potential supplier of semi-finished steels. However, buyers in the region face the constraint of few regional banks willing to handle the financing of import of the material from Iran.
TAN AH YONG