Posted on 08 Jan 2017
Steel prices, which have declined sharply in recent years driven down by China's oversupply, are now on an upward trajectory. Steelmakers expect strong demand to continue to support prices, but a potential fall in raw materials prices remains a downside risk.
Steel prices started to plunge in 2014 after Chinese steelmakers with excess production capacity flooded the global market with their products, creating a glut. But the situation reversed in the latter half of 2016 as manufacturers curtailed supply while demand grew, causing prices to soar.
In a sign of strong demand, steel sheet for autos produced in Japan began in November to be shipped by air, instead of the usual but slower marine route, to Southeast Asian countries for customers impatient for the products. Shipping steel by air is a surprising development because it compromises profitability, said a Japanese trading company insider.
"It's been a long time since last I saw steel products being shipped by air," he said.
The current buoyant steel market began after the costs of raw materials shot up last fall and Asian steelmakers cut production.
Prices of coking coal used in steelmaking, in November rose above $300 per ton to reach a five-year high after China restricted operating days for coal mining companies. Prices of iron ore, the main steelmaking raw material, also shot up.
As a result, the Asian prices of hot-rolled coil, which has numerous uses in manufacturing, exceeded $500, about 80% above the low reached in early 2016.
The demand-side situation has improved, too. In China, steel consumption is being buoyed by tax cuts on small car sales that boosted new car sales. The Chinese government's infrastructure-building programs, such as road construction, are also driving demand.
After a recent trip to China, Kiyoshi Imamura, managing director at Tokyo Steel Manufacturing, said he is confident steel demand will remain strong.
"There's no sign the demand for infrastructure-use steel is shrinking, and the steel market has entered an enduring bullish cycle," Imamura said.
Steel sheet is now in short supply in Asia, which is affecting the Japanese steelmakers, so much so that they have started to curtail new orders. Nippon Steel & Sumitomo Metal in December curtailed the amount of orders it accepts for products for retail sale by 20-40%. The company is in no hurry to lift the order restrictions.
A steel processor-distributor in Chiba Prefecture was recently informed by its supplier, a steelmaker operating blast furnaces, that it is "just fine with no orders for steel sheet," according to one insider. The processor-distributor is experiencing a shortage of H-beams in its inventory.
In Japan, steelmakers operating electric and blast furnaces are continuing to attempt to pass on the rising cost of steelmaking materials.
A major factor tightening supply in the country is a rush of redevelopment projects in central Tokyo. Next spring, projects for facilities for the 2020 Tokyo Olympics will start in earnest.
The global economy is also recovering, prompting Goldman Sachs to raise its 2017 global capital expenditure growth forecast to 3.2%, over the 1.5% of 2016.
But even as many expect continued price rises for steel products, a potential drop in raw material costs remains a disrupting factor. After China relaxed the operating-day restrictions and production rebounded, coking coal spot prices have fallen to about $250 per ton, 20% below the high reached in November.
In a view that dampens steelmakers' hopes for continued rises in steel prices, Kiah Wei Giam, a coal analyst at Wood Mackenzie, a British research company, predicts average coking coal prices will drop further, to as low as $160 per ton in 2017.
Australian investment bank Macquarie Group expects steel prices may lose upward momentum in the latter half of 2017, as it believes an expected surge in demand from the real estate industry and infrastructure projects will only prove to be inflated, and lingering overcapacity at Chinese steelmakers will lead to market declines.
China's overcapacity, the main factor driving the recent steel market downcycle, is expected to take over five years to dissipate, presenting a risk that a drop in domestic demand may prompt Chinese steelmakers to once again flood the global market.
