Steel demand, production, and prices have plummeted, major layoffs have been announced, and demand for key raw materials such as iron ore, ferrous scrap, and coal has declined sharply, said OECD Steel Committee Chairman Risaburo Nezu. The short-term outlook for steel demand is exceptionally weak, reflecting depressed capital investment, construction activity and car production in many economies.
The meeting, held at the invitation of the Malaysian government, assessed the impact of the global economic slowdown and financial crisis on steel-related raw material markets. It also focussed on ways to ensure secure, predictable, affordable and non-discriminatory access to steel raw materials for all market participants.
Statement from Risaburo Nezu (Japan), Chairman of the OECD Steel Committee:
"The strong upturn in steel demand which began in 2002 has come to an abrupt halt. Growth in demand for steel began to weaken appreciably in August 2008, in response to slowdowns in construction activity in developed economies and China’s moderating economic expansion. Since then, the extraordinary set of events surrounding the financial sector and the sharp deterioration in business prospects for steel-consuming industries have led to depressed steel demand conditions in all major markets.
Demand is particularly weak in North America, Europe, and even regions such the Middle East where stocks have reached high levels. China’s steel demand, which accounts for 35% of the world total, is showing signs of weakening, with steel traders halting purchases in order to reduce inventories. Declining global demand has sent steel prices down sharply for most products in most regions over the last few months. Prices in some markets are down by almost 50% from their summer peak levels.
Market prospects for 2009 are weak
The short-term outlook for steel demand is weak. The prospects for construction activity and investment in capital equipment, both highly sensitive to the availability of capital, have softened significantly. Consumer spending on durable steel-intensive goods such as automobiles and household appliances is also likely to be modest, affected by lower availability of consumer loans, rising unemployment and low consumer confidence. As a result, global demand for steel should continue to be weak in 2009.
Producers are cutting production and reining in capacity expansions
Steel mills have introduced massive production cuts over the past few months in response to weakening demand and sharply rising inventories. Credit conditions have been a key factor affecting demand. The scale and geographical extent of the cuts are unprecedented. Production cuts have been especially pronounced in the CIS (former Soviet republics) and China in recent months, where seasonally adjusted production fell by a cumulative 35% and 25% respectively in July-October 2008. Production was down 14% in NAFTA, 11% in the EU, 6% in Japan and 3% in South America during this period, with faster declines reported or expected for November and December.
The tightening of credit and weaker prospects for demand have stalled the expansion plans of some steelmakers, particularly in the CIS region, where significant debt has been incurred by steelmakers as a result of aggressive expansion activity in recent years. In China, steelmaking capacity is still expected to grow over the longer term. In the short-term, many small and outdated facilities may shut down in response to weak demand and government efforts to foster consolidation. In India, capacity will increase by less than was previously expected, reflecting delays to many greenfield projects and weaker market conditions. Thus, despite sharp declines in demand, world steelmaking capacity is projected to continue to increase from 1,563 million tonnes in 2007 and an estimated 1,636 million tonnes in 2008 to 1,779 million tonnes in 2010. The 2010 level has been revised down by 74 million tonnes compared with projections made last spring.
Trade disruptions are of concern
The drop in worldwide steel demand coupled with increased capacity will likely lead to price weakness and/or idle capacity worldwide. This could also alter trade flows significantly. Adding to the uncertainties are recent policy measures in some countries in the face of stagnating domestic demand for steel and declining market demand elsewhere. This is causing widespread concern as it raises the risk of increased trade frictions and trade-distorting practices going forward.
Steel raw material markets and government policies
Participants also exchanged views on developments in raw material markets and discussed policy approaches adopted by their governments. There was widespread agreement among participants that steel raw material industries had experienced extraordinary good years during the period 2002 until mid-2008. Output, prices, trade and profitability rose steadily and reached record-high levels, thus providing incentives for companies to increase production worldwide, to open new mines, to consolidate via mergers, acquisitions and joint ventures, and to improve technology. Furthermore, the surge in demand and prices attracted new players from emerging economies to world markets.
Steel raw material markets started to turn sharply downwards in mid-2008. In recent months, scrap prices have fallen to levels less than a quarter of those observed in late 2007. The bottom of the scrap metal industry had fallen out by the end of November, with low collection rates and the cancellation of contracts running to one billion US dollars. The situation for iron ore, coal and ferroalloys was reported as being less dramatic as large quantities are sold on the basis of long-term contracts with prices fixed annually. Participants noted the uncertainties surrounding future price developments, but were convinced that these prices are likely to decline when annual contracts are negotiated. Spot prices have already fallen significantly while most of the major producers are now curtailing production.
The secure, predictable, non-discriminatory and accessible supply of steel materials at reasonable costs is an issue of prime importance for all steelmakers. Participants noted that each steel company pursues its own course of action depending on factors such as market circumstances, location, financial strength but also the extent to which the company is a global player. Some broad trends were noted: the reliance on spot markets and bundling of purchases; securing raw materials via long-term quantity contracts with annual price negotiations; upstream integration by acquiring or developing new sources of raw materials; improvements in energy consumption and recycling; and innovation and the usage of up-to-date technologies.
It was agreed that access to steel related raw materials is critically important to manufacturing industries in all countries. It was apparent that, while a large majority of countries observe market economy principles, some other governments impose various kinds of restraints on trade and investment in raw materials. Interventions include export restrictions, taxes and licenses, restrictive investment rules, price fixing, double pricing systems, subsidies, import duties and government assistance in obtaining raw materials. Participants noted and discussed the various forms of intervention. Some countries expressed concerns that such measures cause trade distortions in the global steel market and called for a level playing field. Some participants also expressed concerns about the competition effects of supplier concentration in some raw material markets.
Participants agreed that there is a need to improve transparency through consistent collection, analysis and sharing of information in order to foster co-operation between economies. They concurred that the OECD Steel Committee should be asked to prepare an inventory of existing measures and examine policy issues in this context.
The meeting was attended by representatives from OECD countries as well as Argentina, Brazil, Chile, China, Russia, Malaysia, Chinese Taipei and Ukraine."
