A snapshot of the steel market

The price and supply of iron ore heavily influences what steel producers can make and at what cost. This year [2019] saw an unexpected price spike after a tailings dam collapsed at a mine belonging to Vale, a Brazilian multinational. Vale subsequently closed any mine with the same type of dam. This halted about 50-60m tonnes, on an annual rate, although some capacity should be operational by the end of this year. A cyclone in Australia, another large exporter, was another force behind the cost increase, affecting two major producers there: Rio Tinto and BHP. However, some smaller producers are filling the gap and taking advantage of this spike.

This disruption also affects the quality that is available, or the percentage of iron in the ore. Vale supplies a mix of 65% and 62% purity grades, whereas BHP and Rio Tinto produce 62%, which is more typical in Australia, and Fortescue supplies 58%. These four companies make up the lion’s share of production. What grade is used depends on what’s being made. Owing to Vale’s mine closures, there has been a shortage of 62% in Europe, whereas the vast majority of Australia’s supplies go to China. 

Iron ore hit a high of USD 126 per tonne in July, up from USD 73 in January, while at the beginning of October it stood at about USD 90. Although prices are yet to normalise, an expert predicts this could happen by end-2020. However, this also depends on demand picking up, and there is still unease in the market with the uncertainty caused by the China-US trade war.

China is the biggest market; it produces and consumes about half the world’s steel. Although there is high local demand, January-September 2019 also saw 33.2m tonnes shipped abroad, representing about 7% of the country’s production. Due to the sheer size of China’s output, movements in the market here have repercussions elsewhere. One expert we interviewed estimated that production will continue to increase, hitting 1bn tonnes in 2020. It will start to taper eventually though, standing at 900m tonnes in 2025. Making up a large share of this output, the three largest producers, respectively, are China Baowu Group, HBIS Group (Hesteel) and Shagang Group.

One trend that two specialists pointed to is China becoming more self-sufficient in scrap. This is happening now due to the scrap cycle, which takes about 10 years – meaning that steel made previously is now ready to be recycled. Indeed, China imported zero iron or steel scrap in August this year – and, as a result, there are two main impacts. First, if China is making steel out of what it already has, then there is no need to import iron ore. At a time when prices are high for the commodity, this lessens demand and supports low prices. Second, in the long term, China could potentially become an exporter of scrap – a market worth multiple billions.

Despite its share in world production going down in the past decade, Europe is still a major steel manufacturer. A recent challenge for the region has been the introduction of the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). This came into force in September 2018 and is used to calculate fuel consumption and CO2 emissions. Although this is a worldwide standard, it has been particularly damaging in Europe. Car sales have dropped significantly, denting demand for steel. One expert estimates that the drop in production seen in Spain, Europe’s second-largest auto manufacturer, stands at 5%, whereas elsewhere in the region it could be as high as 15%.

However, our Interviews pointed to something that is mitigating the lower demand Europe has experienced: specialised steel. New models of cars are increasingly moving from grades that used to be found elsewhere, say China or Turkey, to those made in European mills. It is estimated that 15-20% of steel grades can only or mainly be produced in Europe. One specialist highlighted Volvo’s use of manganese-boron, which is difficult to obtain outside the EU. Higher-grade steel is also necessary for lightweighting cars while keeping them strong. For instance, electric vehicles have heavier engines and need to support an additional 300-500 extra kilograms per car. ArcelorMittal is one of the major players in this space, as well as Thyssenkrupp, Tata, Salzgitter and Voestalpine.

This year India overtook Japan as the world’s second-largest steel producer. As steel production and GDP correlate, it means that India should be seeing 7-8% growth in steel demand this year. However, output varies across the country. In the south and east, owing to the availability of raw materials, the capacity utilisation rate stands at 85-95%. This figure is 70-80% in the north and west, which is partly down to lower auto and infrastructure demand. Capacity utilisation rates vary, once again, when looking at the type of steel produced. There has been about a 20% dip in flat steel capacity utilisation, which is generally used for making cars and white goods, owing to auto inventories being high and less demand from infrastructure projects. JSW and Tata, which are integrated steel manufacturers, number among those investing heavily in flats.

Indian steel production looks set to remain strong in the long term too. The government released the National Steel Policy in 2017, aiming for 300m tonnes of steelmaking capacity by 2030. And, according to one expert, this means that “everybody is putting [in] new facilities”, naming Tata, JSW, JSPL and SAIL as examples. He estimates that 30m tonnes of capacity will be added by 2025, bringing the country to a total of 150m tonnes. Most of this will come from the integrated steel plants, and approximately 70% will be flat steel, with the rest made up by long products.

There are two main difficulties that the country’s plants face though. The availability of domestic materials is one issue. Some steel plants have access to iron ore, such as SAIL, Tata and JSW. But it is difficult to obtain mining leases, and although there are state-run mines, such as those run by Odisha Mining Corporation, the country largely remains dependent on imports. Another obstacle is logistics. Railways are the cheapest mode of transport for raw materials and finished products. But the country’s infrastructure is not yet prepared to handle the growth that the government is targeting.

A myriad global factors, from raw materials to regulations, play a part in establishing supply and demand patterns.