Steel: Australia’s Big Fall

Amid all the talk and dire headlines about the decision by BlueScope Steel to close two plants and sack 1,000 people this week, there's been very little examination of just what's happening to steel demand.

No production figures have been produced, except in generalities and there seems to be agreement that production and demand are down, which they are.

But as we pointed out last month, the fall is probably deeper than most casual investors would understand: in fact steel production in this country is at its lowest level for two years, and demand has been weakening for most of 2011.

In contrast steel production in the rest of the world remains fairly buoyant especially in China, the most important producer (and the most important market for Australian iron ore and coal exporters, which include OneSteel, one of our steel producers).

Australian production sank further in July to 488,000 tonnes from 498,000 tonnes in June, down from the 658,000 tonnes in March and 563,000 in May, according to figures released this week by the World Steel Association.

Steel production has fallen by around 25% since the start of the year.

It was the lowest monthly total since July 2009, near the depth of the GFC.

The July figure was a huge 170,000 tonnes or 26% under the 669,000 tonnes produced in July of last year.

And Australian production for the first six months of this year was 3.415 million tonnes, 1.22 million tonnes down or 26.4% on the 4,637 million tonnes produced in the first seven months of 2010.

Global crude steel production in July rose 11.5% from a year earlier to 127.4 million tonnes, despite another month of slowing output from record levels in the previous two months (see the above graphic).

July's output was down from the 128.3 million tonnes in July and the all time high of 129.77 million tonnes in May.

July's production was up 11.5% from the same month last year, when just over 114 million tonnes were produced.

Output in January-July totalled 887 million tonnes, up 8.3% year-on-year, the Brussels-based industry group said in a report.

The global steel capacity utilization ratio fell to 79.7% from June's 82.8% for the 64 countries reporting to the industry group.

July's rate was the lowest this year so far.

Compared with July 2010, the latest utilization ratio rose by 4.9 percentage points, it said.

Daily average output fell to 4.11 million tonnes in July, from June's 4.26 million tonnes -- the highest daily rate seen to date.

China's steel output grew 15.5% from July 2010 to 59.3 million tonnes, accounting for 46.5% of total global steel output last month.

The previous month China produced 59.9 million tonnes.

Note that Chinese steel production has held up remarkably well while industrial production generally has eased and the monthly surveys of manufacturing activity have fallen into a slight contraction phase.

Japan produced 9.1 million tonnes of crude steel in July, down 1.2% compared with the same month of 2010, but up from 8.9 million in June.

South Korea's output was 5.66 million tonnes, 21.7% up on July 2010 and steady with June's level.

Steelmakers throughout Asia, including India and Taiwan, produced 82.2 million tonnes, up 13% in July from the same month in 2010, but down from the 83.3 million produced in June.

Crude steel production in the EU-27 increased 5.9% from a year earlier to 14.6 million tonnes in July, but trailed June's 15.7 million tonnes and May's 16.3 million total.

Germany led the group with 3.7 million tonnes, up 5.7% on the year, followed by Italy with an estimated 2.6 million, up 14.5%. Output in Spain was down 1.9% year-on-year to 975,000 million tonnes, while France dropped 7% to 1.2 million.

Russian output showed year-on-year growth of 8.1% to 5.95 million tonnes. Ukraine's crude steel output rose 10.3% to 2.73 million tonnes.

In the Americas, US steel output was up 10.2% in July to 7.46 million tonnes, Canada was down 1.5% at 1.22 million tonnes, and Brazil was up 8.2% to 3.1 million. Mexico led output growth in the region with a 26% jump to 1.74 million tonnes in July.

In fact North American production hit 10.54 million tonnes in July, the highest so far this year and well up on the 9.48 million produced in July of last year.

Iron ore prices meanwhile hit three month highs this week, as the solid level of production continues to support demand.

In fact world spot iron ore prices hit three month highs this week.

Reuters said index based spot prices rose to a range of $US178.30 -$US180.25 a tonne on Wednesday.

Indian 63.5/63 (iron content) grade ore traded at $US187-$US189 a tonne, cost and freight, yesterday.

Australian 62% Newman fines were quoted at $US182-$US184 a tonne cost and freight.

And despite fond hopes from the Chinese steel industry and its spokesmen for these prices to ease (by warning of Chinese steel mills cutting purchases of prices rise to high), there's not much chance of that happening.

This report from India explains why:

"Iron ore exports are likely to decline 28 per cent this year on falling domestic production due to mine closures across the country.

"According to R K Sharma, secretary general of the Federation of Indian Mineral Industries (Fimi), total exports are likely to slump to around 70 million tonnes (mt) this financial year, due to fall in production by major private mines.

"Total exports from India declined 17 per cent to 97.65 mt in the financial year 2010-11 as compared to 117.37 mt in the earlier financial year.

"Iron ore supply to domestic steel and downstream sector units was also hampered due to miners unwilling to continue excavation as domestic steel mills do not lift low-grade fines,." The Business Standard reported.

That's music to the balance sheets and profit and loss accounts of BHP Billiton, Rio Tinto, Fortescue, OneSteel (and Vale in Brazil), because much of that ore heads to China.