Transcript Document

STEEL INDUSTRY UNDER THE PRESSURE
OF DISTRESSED MARKET:
THE WAY PASSED AND OUTLOOK FOR
RECOVERY
Presented by Dr. V. Vlasjuk
UPE Co. Research&Consulting, Ukraine
12th Central and Eastern European Steel Conference
Prague – September 2009
I. World finance and steel industry
1. Crude steel consumption per capita as fundamental
for further steel demand growth
800
kg
700
Consumption level for advanced countries
~550-650 kg
600
671
558
500
400
330
321
265
300
200
128
100
47
0
China Brasil
India
Russia Ukraine
Germany Japan
Source: WSA, UPE Co. estimation
Strategically world steel demand is high. The difference between the
present consumption per capita in developing countries and standards for
advanced economies creates the great potential for further growth
I. World finance and steel industry
2. World steel consumption affected by finance disturbance
1,600
Industrialization of developing countries
(China, India, Iran, Brasil etc. )
1,400
mln tonnes
1,200
Industrial recovery of
W.Europe and Japan
1,000
500 Mt
The biggest cyclic
fall since the Great
Depression
800
600
500 Mt
400
forecast
200
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
0
Source: WSA (fact), UPE (forecast)
Approx. 1150 Mt of crude steel will be consumed in the world in 2009 that is
160 Mt (-12.2%) less than in 2007. So, steel industry has proved to be very
sensitive to the financial risks, more than to the risks of another nature
I. World finance and steel industry
3. Volatility of steel market as a result of uncontrolled
easy-money policy
1400
Billet, $/t fob Black Sea
Price
bubble
1200
Credit boom
Credit flows are dried
1000
800
Easy-money policy
Commodity markets
are frozen
600
400
200
0
J F MAM J J A SO ND J F MAM J J A SO ND J F MAM J J A SO ND J F MAM J J A SO ND
2006
2007
2008
2009
Source: UPE
The current crisis has demonstrated that steel industry can be something like a toy in the
hands of financiers. So, to shape more confident future of real economy, financial system
should be reformed to become more transparent, manageable and responsible
II. Where is market now?
4. Macroeconomic development in 2009
8%
Industrial production, % m-to-m
5.9%
5.7%
6%
4%
2.3%
2.1%
1.6%
2%
0.1%
0.5%
0%
-0.1%
-0.2%
-0.7%
-2%
-1.1%
-1.1%
-0.4%
-0.9%
-1.0%
-4% -2.0%
-1.8%
-1.7%
-2.3%
-2.0%
-2.4%
-6%
USA EU-27 Japan
-8%
-10%
Source: National Statistics Offices
-9.4%
-9.6%
-10.2%
-12%
10%
World steel production, % m-to-m
5%
8.8%
7.8%
2.4%
3.9%
4.2%
0%
-3.9%
-2.0%
-3.4%
-5%
Dec 08
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Source: WSA
The developed economies which create the main picture of present crisis
have started to demonstrate first signs of recovery in April-May. Since May
steel production also has been increasing on a month-to-month basis
II. Where is market now?
5. Dynamics of some industrial indicators important
for steel consumption
1.2
USA new housing starts, mln. units
1.0
0.8
USA housing market has recovered with a
moderate pace since May as follows from
increase of new housing starts and sales
stimulated by Governmental mortgage
program and significant price fall
0.6
0.4
0.2
0.0
J F M A M J J A S O N D J F M A M J J
2008
USD bln.
35
30
25
20
15
10
5
0
-5
-10
-15
2009
Source: USA Department of Commerce
Dynamics of construction projects on hold
or cancelled in Saudi Arabia
29
7
10.5
The slowing pace of new projects being put
on hold probably reflects the fact that the
bottom in construction sector was reached
in 1Q while starting from 2Q we could
observe the upward trend
6
0.5
-13
2Q 08
3Q 08
4Q 08
1Q 09
2Q 09
3Q 09
est
Source: MEED Projects
II. Where is market now?
6. Macroeconomic and financial indicators
(evolution from pre-crisis till now)
Indicators
Jul 08
Jan 09
Sept 09
Interest rate of Federal Reserve System (USA), %
2,0
0,25
0,25
Interest rate of European Central Bank (EU), %
4,25
2,0
1,0
Interest rate of Bank of Japan, %
0,5
0,1
0,1
3 month USD LIBOR/OIS spread, b.p.
70
120
13*
Commercial bank deposits at ЕCB, $ bn
0,6
360
190
Oil (Brent), $/barrel
138
42
71
Jul 08
Jan 09
Jul 09
USA
5,6
0,0
-2,1
Eurozone
4,0
1,1
-0,7
Japan
2,3
0,0
-2,2
Inflation rate, % (y/y):
Source: IMF, Bloomberg
* Pre-crisis level-10-15 (June 2007)
Some key financial market indicators show improvement, however “toxic
assets” remain high and investment activity still remains under pressure of
uncertainty and shortage of credit
II. Where is market now?
mln tonnes
7. The main stages of steel market development in
time of crisis
Rapid market freezing
and overproduction
140
120
December-March can
be identified as bottom
for steel market in view
of current economic
indicators
The first signs of
recovery and very
fragile market balance
100
80
World
(w/o China)
60
40
20
China
0
J
F M A M J
Source: WSA
J
2008
A S O N D
J
F M A M J
J
2009
Starting May in response to improving demand, world steel production demonstrates an increase
on month-to-month basis after the biggest drop in December. Present economic and financial
indicators allow to say that the bottom obviously was passed in December 2008 – March 2009
III. Ukrainian steel sector under condition of
distressed market
8. Steel production by regions 2009/2008
chng. % 7 months 2009/ 7 months 2008
10%
3.2%
World
EU27
USA
China
Turkey
Ukraine
-10%
Russia
0%
-20%
-19.7%
-15.9%
-30%
-40%
-27.7%
-37.0%
-42.1%
-50%
-50.5%
-60%
Source: WSA
This year Ukrainian steel production has dropped more in comparison with other leading
exporters. But advanced economies have suffered the most crucial decrease
III. Ukrainian steel sector under condition of
distressed market
9. Capacity utilization in Ukraine
100%
90.4%
utilization %
90%
80%
68.0%
63.2%
70%
60%
54.5%
50%
58.4%
40%
30%
32.5%
20%
10%
16-Sep-09
16-Aug-09
16-Jul-09
16-Jun-09
16-May-09
16-Apr-09
16-Mar-09
16-Feb-09
16-Jan-09
16-Dec-08
16-Nov-08
16-Oct-08
16-Sep-08
16-Aug-08
16-Jul-08
16-Jun-08
16-May-08
16-Apr-08
16-Mar-08
16-Feb-08
16-Jan-08
0%
Source: UPE
Currently Ukrainian steel capacity is used by 58.4%, while minimum (32.5%) was observed in
November 2008. The average operating rate in January-August 2009 is 59.2%.
So, Ukrainian industry has managed to keep its order book at a level necessary to survive
III. Ukrainian steel sector under condition of
distressed market
10. Steel cost in Ukraine before crisis and now
700
$/t
$585
600
500
400
72
33
22
others
el/energy
$304
185
200
161
60
29
28
42
77
68
0
Source: UPE
Billet
112
300
100
Direct expenses
(raw + energy + labour)
Aug 2008
Oct 2009
before crisis
current
natural gas
scrap
iron ore
coking coal
Under the conditions of crisis Ukrainian steel sector has demonstrated sufficient
strength due to ability to reduce production costs. It becomes possible after
decrease of iron ore and coking coal prices, correspondingly by 51% and 65%
III. Ukrainian steel sector under condition of
distressed market
11. Steel cost by main exporters
Direct expenses (raw + energy + labour)
Billet
700
600
before crisis
585
352
400
304
300
604
506
454
500
$/t
currently
371
259
200
100
0
Ukraine
Source: UPE
Russia
China
Turkey
(EAF)
Now the Ukrainian steel cost is lower than those of other leading exporters of ordinary
steel, except for Russia. This allows Ukrainian exporters to compete not only in the
Middle East, but in South East Asia and China
III. Ukrainian steel sector under condition of
distressed market
12. Ukrainian steel export by regions 2009/2008
mln tonnes
7 months 2008
Asia (w/o China)
7 months 2009
3.5
2.1
America
China
2.0
1.9
1.1
0.6
CIS 2.2
1.2
1.8
0.0
Africa
1.5
1.7
1.6
3.4
EU27
Source: UPE
3.5
2.7
Europe (non-EU)
Middle East
3.6
Production cost decrease
and consequently low
prices have allowed
Ukrainian exporters to
keep their position on
Asian markets and save
export portfolio. The
dramatic fall of steel
export to Europe, USA
and CIS was partially
compensated by growing
shipments to China
III. Ukrainian steel sector under condition of
distressed market
mln tonnes
13. Expected steel sector performance in 2009
40
37.1
-23.1%
2008
35
30
28.5
2009
-14.6%
26.3
22.4
25
20
-35.2%
15
9.1
10
5.9
5
0
Source: UPE
production
(crude steel)
export
(steel products)
consumption
(steel products)
This year Ukraine will produce 28.5 Mt crude steel that is less than last year production
by 8.6 Mt. There will be lost approximately 4 Mt export and 3 Mt domestic shipment
IV. Forecast & scenario 4Q-2009
14. Estimation of current market balance
15%
USA crude steel production
Industrial output
Construction
10%
The present level
of steel inventories:
5%
 USA – 6,3 Mt
(lowest from July 2008 with
decreasing tendency)
0%
-5%
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
20%
EU crude steel production
Industrial output
Construction
15%
 EU – remains high with
decreasing trend
 Japan – 5,6 Mt (low)
 China – most data affirms
about high inventories
10%
5%
 Middle East – sufficient to stay
out of market over 2-3 weeks
0%
-5%
-10%
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Source: WSA, Eurostat, USA
Department of Commerce
Generally steel market in advanced economies has already passed through destocking phase in JuneJuly. In July-early August the market has come to state of fragile balance. But in September due to
increasing steel production and demand slowing some excess of steel proposal can be expected.
Consequently this excess should be consumed in 4Q 2009.
IV. Forecast & scenario 4Q-2009
15. Prospective performance of main steel-using
sectors in 4Q-2009
6%
5%
% 4Q/3Q
5.0%
5.0%
5.0%
construction
In 4Q 2009 a growth is expected in construction
sector of USA, EU, China, Russia and Middle East
mostly due to increasing governmental investment
into infrastructure. As a result, one should expect
the growing demand for long products
4%
3.0%
3%
2.0%
2%
1.0%
1%
0%
1%
0%
0.5%
-1%
0.0%
n/a
-2%
-2.0%
-3%
-4%
automotive
-5%
-6%
-5.0%
-7%
-7.0%
2.5%
-8%
3%
machinery
2.0%
The automotive sector of EU, China and Russia will
show some drop in production because of ending
the vehicle-stimulating programs in Europe
(Germany) as well as permanent weak demand for
new cars. So, it leads to decrease of demand for
hot-rolled coil
2.0%
2%
1.0%
1.0%
1%
n/a
0%
EU
USA
China
Russia Japan Middle
East
Source: Bloomberg, UPE est.
Machinery will demonstrate growth in 4Q-2009.
Also heavy plate demand is expected to increase
due to growth of order in shipbuilding in China
and South East Asia.
In 4Q 2009 we can expect the increasing demand for long products, but descending trend for some flat
products, particularly for hot-rolled coil
IV. Forecast & scenario 4Q-2009
16. Utilization of world steel capacity
(current and forecast)
100%
95%
93.9%
91.5%
90%
85%
76.8%
80%
75%
69.4%
70%
65%
63.9%
60%
55%
50%
J F M A M J J A S O N D J F M A M J J A S O N D
Source: UPE
2008
2009
Expected growing demand for steel under condition of near to normal inventories
will lead to slight increasing order portfolio and capacity utilization in 4Q-2009.
IV. Forecast & scenario 4Q-2009
17. Risk factor - China: Chinese game on the global market
China's export
HRC price
8,000
1,200
1,000
7,000
6,000
800
5,000
600
4,000
3,000
400
2,000
200
1,000
0
billet, $/t fob Black Sea
China's export, mln tonnes
9,000
0
J F MA M J J A S O N D J F MA M J J A S O N D J F M A M J J A S O N D
2007
2008
2009
Source: ISSB, UPE
Presently China is a world price determining power. During 2007-2008 the price
trend depended essentially upon Chinese export activity
IV. Forecast & scenario 4Q-2009
 Currently Chinese steel sector is
operating at full capacity (~93%).
Decreasing domestic steel demand in
July-September creates product
surplus and thus increases export
potential
140
130
120
110
100
production
apparent consumption
90
80
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2007
mln tonnes
 This year China has demonstrated itself
as self-sufficient in steel
mln tonnes
18. Risk factor - China: Expected China's behaviour in 4Q 2009
2008
2.5
2.0
2009
Chinese export 2009
1.87
1.50
1.5
2.08
1.74
1.62
1.34
1.29
1.38
1.0
0.5
0.0
Jan09
 China would continue export
expansion in 4Q. However higher
production costs in China compared
with those of other exporters (Ukraine
and Russia) will restrict scope for
Chinese export.
450
400
350
300
250
200
150
Feb- Mar09
09
$/t
Apr- May- Jun09
09
09
Jul- Aug09
09
Direct production cost
(raw + energy + labour)
HRC
340
400
280
100
50
0
Source: UPE
Ukraine
Russia
China
China will hardly continue its export expansion in 4Q because of
expected increase of domestic demand and production cost barrier
IV. Forecast & scenario 4Q-2009
19. The current active model of steel price trend
billet, $/t fob Black Sea
1400
1200
1000
Low demand
800
600
400
200
Production cost
0
J F M A M J
Source: UPE
J A S O N D J F M A M J
2008
J A S O N D
2009
At present time steel prices are moving in a narrow horizontal corridor,
pressed by low demand from above and high production cost from below.
Under growing demand in 4Q-2009, prices will rise, being pushed up by producers strongly
motivated to improve their financial position
IV. Forecast & scenario 4Q-2009
20. Expected price in 4Q-2009
550
billet
HRC
510
515
$/t fob Black Sea
500
450
400
440
410
350
forecast
300
250
J
F
M
Source: UPE
A
M
J
J
A
S
O
N
D
2009
Upward trend and price increase by $25-50/t are expected for long steel products till the end
of 2009 because of steady demand on growing construction market.
HRC will demonstrate moderate plummeting tendency in October-November followed by
slight rise till the end of the year. Also Chinese factor due to production cost restrictions will
give the space for CIS exporters to play bullish game
V. Forecast & scenario 2010
21. The glance into the next year
Supporting factors
•
Industry and construction
growth
•
•
Credit growth
Recovery of steel
consumption
Suppressing factors
 Budgets deficits
 High inflation rate
 Financial unstability
Risks for steel market


Speculative price bubbles
Fragile market balance and overproduction

Depreciation of the USD
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