British Steel is in the hands of receivers (again). This once mighty producer can still be viewed as a canary in the coal mine, indicating when circumstances for everyone else are turning toxic.
The perilous situation of the UK’s steel industry is in part about the state of the UK, but to what extent do its fortunes, and indeed the elastic fortunes of the Capesize market this year reflect the condition of the global economy and the steel industry that builds the world?
Global steel production, according to the World Steel Association, fell by 2% quarter on quarter in the first three months of this year to 155.0 Mn Tonnes, after a fall of 1% in the last quarter of 2018. Production in Q3 of 2018 was itself unchanged from Q2. We live in a world in which steel consumption has not grown for three quarters.
Part of the reason is generally weak economic performance in the first quarter of 2019 around the world. Activity the OECD was moribund, as investors held back from new ventures while waiting for issues like the US-China trade spat and Brexit to resolve themselves. They still haven’t and investors are still nervous. The US sanctions on imported steel and aluminium will increase costs for auto manufacturers in the US, driving down profits and possibly production. Those auto producers are not exclusively American. Overseas-owned auto manufacturers will be subject to the same cost pressures.
Steel prices fell from a peak of USD 781 in April last year to a low of USD 680 in December. After a recovery to around USD 730 per tonne in January, their fall has continued in 2019, reaching around USD 625 per tonne in mid-May. Meanwhile the iron ore price has risen to around USD 100 per tonne. Margins for steel makers have been destroyed. According to industry sources, steel distributors are offering ever deeper discounts to move product, with 61 per cent of US manufacturers responding to a survey by The Fabricator publication saying they were offered discounts in May this year, compared to 29 per cent in April. This, opines The Fabricator, is nearly the capitulation point which could indicate the bottom of the market. There isn’t much time for the global steel market to recover before the summer shutdowns in the Northern Hemisphere start to bite.
There are signs that falling prices will outlast the good weather in the North. Taiwan’s leading steel producer China Steel Corp announced on 24th May that it will cut list prices of all its steel products by TWD 529 to TWD 1,066 per tonne (around USD 17 – USD 34) for local sales during Q3 this year. CSC blamed “global economic growth…expected to be affected by the increasing uncertainty in international political and economic environments with the escalation in the Sino-US trade friction.”
There is also increasing evidence that steel recycling is eating into virgin steel production growth, especially in China. The Mysteel steel scrap index rose by RMB 6.8 per tonne (about a dollar) to RMB 2,528.5 per tonne, with traders reporting that higher iron ore and coking coal costs for steel mills are driving them to procure more scrap. Coking coal stocks at Chinese coke plants are reported to have reached a three month high of 14.6 Mn T on 23 May, though this level remains below the five year average reflecting high spot prices.
The Take Away
Taking steel production, product and raw material prices into account, as well as inventory news, the global steel market is not currently in a happy place. Some of the causes are cyclical, with global economic activity slower this year than last. Some are political, with the US-China trade ware having wider ranging effects than one might expect. That bodes ill for short term in the already volatile Capesize market, as well as for the smaller geared bulkers that export China’s constant surplus of steel products. Q3 is often a tough quarter in the dry bulk freight markets. It looks like being a lean and hungry quarter for ship owners this year.