As 2017 begins to wind down, I would like to reflect on the major developments of the steel industry in the course of the year, particularly in China and their impact on the steel industry in ASEAN.
The global steel industry continues to recover in 2017. While finished steel prices remain volatile, they have largely been able to sustain at levels that enable steelmakers to enjoy healthy margins in sales. In fact, steel prices in China have even reached new record levels, thanks to the stronger-than-expected demand in the domestic market.
As a consequence, steel companies in China have less interest in the export market, leading to a significant drop in the volume of Chinese steel export to the world compared to previous years. In the first eleven months of this year, the total volume of finished steel export from China dipped 30% year-on-year to 69.83 million tonnes. The export volume to ASEAN-6 dropped even more, recording a decline of 42% year-on-year to 17.6 million tonnes in the period January to October 2017.
Besides the strong domestic demand, the concerted effort by the Chinese government in cutting down the excess steel production capacity in the country has also contributed significantly to the improved situation in the steel market in not only China but also around the world. Official announcement from China indicated that it has already succeeded in removing 115 million tonnes of excess capacity over two years while its target for capacity reduction for the five-year period from 2016 to 2020 is between 100 to 150 million tonnes.
While the actual operating capacity shut down could be lower than that stated as the official capacity elimination figure included those already closed down or idle earlier on, the capacity reduction effort has nevertheless brought about a positive result for the steel industry across the globe.
A more significant development in the steel industry in China in 2017 is perhaps the scrapping of the entire illegal induction furnace capacity in the country by the end of June. It is estimated that there were more than 600 induction furnace producers in China with total capacity of around 120 million tonnes, which is not included in the official steel capacity elimination target. Estimated total output of these producers in 2016 was in the range of 30 to 50 million tonnes.
An immediate impact of the above development was the surge in China’s domestic prices of rebar, the main output of the induction furnace producers. This has led to the uncommon situation of prices of rebar surpassing that of the prices of HRC for a straight five months from March to July 2017.
The closure of the induction furnace facilities in China has also some impact on the steel industry in ASEAN, both good and bad. As the main raw material of the induction furnaces is ferrous scrap, the clampdown on the induction furnace producers has resulted in an oversupply situation of ferrous scrap in the Chinese market. Prices of ferrous scrap started to drop and, despite a 40% export duty, there was a sudden surge in the export of the material from China. ASEAN is the main export destination and in the first 10 months of this year, around one million tonnes of ferrous scrap from China were imported into ASEAN-6. This is a positive development for the steelmakers in the region as most of them operate EAF facilities in which scrap is the main feed material.
A less welcome development from the scrapping of induction furnace capacity in China is that ASEAN has also become a preferred destination for the export of the unwanted equipment. Countries like Indonesia, Malaysia and Thailand have all reported increased activities in this direction. The main concern is that this could result in the bringing in of a technology that is not suitable for normal carbon steel production, environmentally unfriendly, high energy consumption and producing sub-standard steel products. The respective industry associations in the affected countries are pressing their governments to control and restrict the imports of such equipment.
Elsewhere, the much-publicised action 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 has failed to reach a speedy conclusion as widely expected, while the Department of Commerce has recently made a positive preliminary determination on the anti-circumvention case involving cold-rolled steel coil and corrosion-resistant sheet from Vietnam.
TAN AH YONG