Steel: More Growth Forecast

Good news for the Australian iron ore and coal industries, and of course the country's balance of payments for the next 18 months or so.

The world steel industry remains confident that this year and next will see solid growth in steel use, despite forecasts of slowing economic growth in major economies from groups like the IMF and OECD.

And there was one reason for the continuing confidence from Big Steel, China and other still growing economies in Asia are expected to maintain their current high levels of consumption of steel.

It means that the billions of dollars mining companies led by BHP Billiton, Rio Tinto, as well as Fortescue are spending expanding their iron ore and coking coal businesses in WA, South Australia, Qld and NW are not being wasted.

The World Steel Association (worldsteel) overnight released its October 2011 Short Range Outlook for 2011 and 2012 and says growth in use will slow next year, but not by as much as some forecasters have suggested.

Worldsteel forecasts that apparent steel use will increase by 6.5% to 1,398 million metric tonnes (mmt) this year and by a further 5.4% in 2012 to more than 1.46 billion tonnes.

So by the end of next year world steel use could be up 150 million tonnes from 2010's level, with more than 70% of that increase occurring in emerging and developing economies, led by China, India and Brazil.

Those forecasts follow the upgraded 15.1% jump in apparent steel use in 2010.

In April, the World Steel Association released its first short term forecast for 2011 and saw an increase of 5.9% to 1,359 mmt this year and 6% next year to 1.441 million tonnes.

Interestingly in its April forecast, the Association said 2010 had seen a rise of 13.2%, but the latest forecast has boosted that to 15.1% following more analysis.

In other words, 2010 was far better than previously reported and as a result the forecast for 2011 and 2012 will actually be bigger than estimated back in April because of the rise in 2010's consumption.

Worldsteel says the projections consider both real and apparent steel use. "Apparent steel use reflects the deliveries of steel to the marketplace from the domestic steel producers as well as from importers. This differs from real steel use, which takes into account steel delivered to or drawn from inventories," the Association explained.

And the main driver will of course be China, helped by solid increases forecast for the likes of India.

The Association said China's apparent steel use in 2011 is expected to increase by 7.5% to 643.2 mmt following 8.5% growth in 2010.

In 2012, Chinese steel demand is expected to rise 6%, which will bring its apparent steel use to 681.6 mmt.

The Association said the new estimates could be described as "cautiously optimistic" because of the continuing problems in the eurozone economies and the sluggish level of activity in the US.

In a commentary with the forecast, Daniel Novegil Chairman of the worldsteel Economics Committee said, "In the first half of 2011, we witnessed sustained momentum in the recovery of steel demand globally carrying over from 2010.

"This is despite a series of anticipated and unanticipated negative developments: the ongoing euro area sovereign debt crisis, the earthquakes in Japan, the political/social unrest in some countries of the MENA region leading to the related surge in oil prices and the tightening of government monetary measures in many emerging economies.

"Today the global economy is facing increased uncertainty over how the ongoing turmoil in the financial markets will evolve and how it will affect the real economy.

"Our current forecast for 2012 assumes that developing economies continue to drive global growth and the policy response to the European sovereign debt crisis prevents increased volatility in the equity and financial markets.

"We expect to see growth performance varying widely across regions.

"The recovery of steel demand in the developed world will be slow while most of the emerging and developing world should continue to enjoy robust growth in their steel demand."

After China, the Association saw Indian usage up next year.

In 2011, India's steel use is forecast to grow by 4.3% to reach 67.7 mmt due to slowing economic growth.

In 2012, the growth rate is forecast to accelerate to 7.9%.

Apparent steel use in the US is forecast to rebound strongly by 11.6% this year, but that growth rate will more than halve next year to 5.2%, to usage estimated at 93.8 mmt.

That will take US usage to 87% of the 2007 level. For North America as a whole, apparent steel use will grow by 9.0%, but slow to a rate of 4.9% in 2011 and 2012 respectively.

In Central and South America, apparent steel use is forecast to grow by 4.7 % in 2011 to reach all time high of 47.8 mmt, according to the Association.

In 2012, the region's apparent steel use is forecast to grow by a further 9.8% to reach 52.4 mmt, almost 28% higher than the 2007 level.

European countries continued to show divergent recovery paths in 2011.

While steel demand in Germany and Poland is expected to grow at impressive rates, steel demand in Spain in contrast is expected to record a sluggish 1.7% improvement.

Overall, apparent steel use in the EU is projected to increase by 7% in 2011 to 155 mmt.

In 2012, the growth of steel demand is expected to stall in most of the European countries with the notable exception of Poland which is forecast to post an impressive 9.5% growth.

Overall, apparent steel use in the EU is forecast to grow by 2.5% to around 158.9 mmt in 2012, bringing it back to only 80% of the 2007 peak.

Japan's steel use is expected to decline by 2.7% to 61.8 mmt this year thanks to disruptions caused by the March 11 earthquake and tsunami.

In 2012 apparent steel use in Japan is forecast to show a growth of 0.8% to reach 62.3 mmt, 77% of the 2007 level.

In the CIS, apparent steel use is forecast to grow by a strong 14.4% in 2011 and then by 7.5% in 2012.

These projections will bring the region's apparent steel use in 2012 to almost 60 mmt, a new high for the region.

Steel demand in MENA region is expected to fall by 0.9% in 2011, mainly due to downward revisions from North African countries.

However, boosted by high oil prices, steel use in the region is forecast to resume growth in 2012 at a rate of 8.7%.

Given that the political situation in the region is far from settled, there exist considerable uncertainties to the current forecasts for this region.

The Association said its current forecast suggests that by 2012, steel use in the developed world will still be at 15% below the 2007 level whereas in the emerging and developing economies, it will be 44% above.

In 2012, the emerging and developing economies will account for 73% of world steel demand in contrast to 61% in 2007.

This means demand for iron ore and coking coal (of all types) will remain stronger for longer because demand is coming from the fastest growing part of the world economy, led by Asia.

And there's another factor to keep in mind: iron ore supplies and pricing.

There are reports some sections of the Indian government want to boost the export duty on iron ore to 30% from the 20% rate set earlier this year.

India recently raised export duty from 15% on lumps and 5% on fines to a uniform 20%.

After the increase, iron ore exports declined by about 22% to 25.2 million tonnes in April-July, compared to the corresponding period last financial year.

India is the world's third biggest iron ore exporter after Brazil and Australia.

Some ministers realise India will need more and more iron ore as steel consumption and production rises.

The uniform duty not only hit India's exports, but also helped push up global iron ore prices and keep them there.

It is estimated that the Chinese spot price for iron ore is up 40% on a year ago, and the duty increase has played a big part in that rise, while the benefits have flowed to exporters in Australia and Brazil.

Another cut in Indian exports in the next six months could help prices steady and not ease as they have started doing in the past quarter.

Late yesterday, Rio Tinto reported record iron ore sales and a 5% jump in output for the September quarter, and forecast continued strong commodities demand.

In its quarterly production report, the company's CEO Tom Albanese said:

"We are operating at full capacity, selling all we produce and our growth programme is on track, supported by the strength of our balance sheet," chief executive Tom Albanese said in the company's quarterly production report.

"Whilst we are mindful of current market volatility, the fundamentals are holding up well, particularly for bulk-traded commodities," he said.

Rio Tinto maintained its 2011 forecast for record production of more than 240 million tonnes and said third-quarter output had rise 5% to 64 million tonnes.

Rio said third quarter iron ore sales of 60 million tonnes (100%) from its Pilbara operations in Western Australia set a new quarterly record as the ports and rail recovered strongly from the bad weather experienced earlier in the year.

Output of hard coking coal rose 14% in the third quarter from a year earlier and surged 55% from the second quarter as Rio Tinto's flood-hit mines in Queensland and NSW returned to normal levels of production and exports.

Other production from the Australian coal operations favoured semi-soft coal which was 57% higher than the third quarter of 2010 with thermal coal 3% lower.

Mined copper continued to be impacted by lower grades at Escondida and Kennecott Utah Copper and was down 32% on the third quarter of 2010.

Bauxite production was up 7% compared with the same quarter of 2010. Aluminium was 2% higher while alumina was 5% lower.