Steelmakers continue to face challenges arising from a glut of capacity in the global market that is driving down margins, and the effects are rippling through the sectors that provide raw steelmaking materials, including metallurgical coal.The pressure on steel prices and a wave of oncoming capacity was dubbed "Steelmageddon" by one analyst earlier this year, noted Becky Hites, president of Steel-Insights LLC, during the recent MetCoke World Summit 2019. The overcapacity issue does not necessarily register as a problem when global economies are growing, but when demand retrenches, the price of steel can fall quickly due to the ready availability of alternative supply."I don't think it's getting resolved, probably in my lifetime," Hites said. "So it's just something we have to live with and learn how to compete with."While capacity utilization in the U.S has recently shown signs of improvement, Hites added that the industry partly shot itself in the foot by raising prices too quickly and too high when the
Trump administration rolled out trade protections in the U.S. "And the truth of the matter is, customers couldn't pass it on, and in the U.S., it's a very emotional market," Hites said. Too many buyers moved to the fence when prices rose because they had plenty of steel; later, when the Federal Reserve raised interest rates, it changed a lot of customers' business plans, Hites added. Still, Hites said the Trump administration's efforts to support steel have been effective, and the potential for policies such as requiring government-funded projects to use U.S.-produced steel could lend further support to the market. The U.S. steel industry represented about 26% of global steel production in 1965, Hites said. Today, it is less than 5% after peaking in the 1970s. However, U.S. crude steel production was up 6.1% in 2018 and is expected to rise again in 2019.While overcapacity is a significant concern, several other factors compound the stress on the industry. For instance, back-and-forth tariffs exchanged between the U.S. and other countries are impacting the global steel trade. "We are obviously seeing not just steel prices, but also volume demand for coking coal and coke being hit," said Hector Forster, a senior editor who oversees iron ore, metallurgical coal and coke coverage at S&P Global Platts. "There is not one single issue. There are multiple issues or multiple factors, and I think the road to go back towards a more sustainable period for coal prices, as well as steel margin and steel prices, is going to be somewhat long and perhaps tough."Coal and coke producers also face falling coke consumption per ton of steel produced while overall growth rates slow. Forster expects that more cuts are looming to match the supply chain to market demand. A big question for the future of the steel industry is what is going on in China, several conference speakers reiterated. "Essentially, there is steel market growth, but globally, it's flying on one engine, and that's China," Forster said. While growth is sputtering
elsewhere, China's demand for steel is on the rise. Much of that growth in demand is already factored into the market, Forster said.Neil Bristow, principal and managing consultant at H&W Worldwide Consulting, said he is not concerned about growth slowing down in China, given the government's "ability to be able to manage its economy reasonably well.""I think there are some emerging green shoots [pointing to] better output and growth in China, which I think will become more apparent certainly just after Chinese New Year," Bristow said. "This year, China has really carried the global steel industry in terms of production, and it has been quite remarkable."Still, predicting what might happen in China to influence steel markets is difficult, Hites said."China's capitalistic, except when it's not, and you can't ever tell when they're going to change their mind and be non-capitalistic," Hites said. "But the government has sent a lot of signals that they're not interested in their Chinese steel companies making
money on the back of exports. They're just not interested in funding that. The fact that they restricted coal imports this year would seem to kind of play into that."Forster suggested the market for steel and raw materials could improve as uncertainty around Brexit or trade disputes between the U.S. and China diminishes. Industry observers are also watching India as steel demand grows along with its economy. However, increasing calls for restrictions on carbon dioxide emissions from the sector, particularly in places such as Europe, are also challenging steel producers.
Source : https://www.spglobal.com