Steel: World Output Slows, 2012 Outlook Mixed

For Australia, the most important global indicator isn't the prices of copper, gold or oil, or even Chinese GDP.

It's the performance of the global steel industry and the level of demand for iron ore and coal.

That's not to say the prices of other commodities aren't useful -- they are, but nowhere near the importance of what's happening in the world's steel industry.

And leading the way, the steel sectors in China, India, Japan, and South Korea which are our major trading partners and the source of most of the accelerated demand (and price hikes) for iron ore and coking coal in the past five years.

It's why we at Air concentrate on the monthly performance of the steel industry, China's trade figures, especially imports, and other news involving iron ore and coal.

The common view now among many investors is that steel, iron ore and coal are facing much tougher times in coming years as China's industry slows and global demand and output weaken.

That's partly right, although many analysts fail to see the surge in demand for both commodities coming from India (in the next couple of years) as its industrial revolution gathers pace (though not at China's recent explosive level of growth).

But a maturing in the growth rate for steel should be expected give the explosion expansion in the past five years which has seen a one third jump in output, led by China's 60% growth.

But it's not necessarily all gloom. Certainly BHP Billiton and Rio Tinto are expanding their iron ore interests as though there will be little easing in demand for the next five years.

That's a result of a deliberate strategy to expand their output to make sure they (and Vale of Brazil is doing something similar) maintain their current positions as the lowest cost producers, so when demand does stagnate, the more recent higher cost rivals in WA and other countries will be the first to encounter financial strains.

Looking at how the global steel industry performed in 2011, figures out this week show that crude steel production hit a new record in 2011, but the pace of growth fell sharply in the second half of the year as the eurozone crisis and the slowing in the Chinese economy hit demand and output.

Global steel production was at 1.527 billion tonnes in 2011, up 6.8% from 2010, data from the World Steel Association showed, down sharply from the 15% rise in 2010 which was driven by the surge in Chinese output.

All the major steel-producing countries apart from Japan and Spain showed growth in 2011.

Growth was particularly strong in Turkey, South Korea and Italy.

Annual production for Asia was 988.2 million tonnes of crude steel in 2011, an increase of 7.9% compared to 2010.

The region's share of world steel production increased slightly from 64.0% in 2010 to 64.7% in 2011.

China's share of world crude steel production increased from 44.7% in 2010 to 45.5% in 2011.

China's crude steel output increased 8.9% in 2011 from 2010 to 683.27 million tonnes. That's slightly slower than the 9.3% growth rate in the previous year, but there was a much sharper 12% fall in second half output compared to the first.

Chinese crude steel production finished the year at 52.16 million tonnes in December, slightly lower than the 52.8 million tonnes produced in the same month of 2010 and 13.3% down from the all time high of 60.2 million tonnes reached in May.

After a very strong first half (as exemplified by the record 60 million tonnes plus output in May), steelmakers in China and worldwide were forced to cut production as the global and Chinese economies slowed.

But in the final quarter, US demand and growth improved noticeably and as a result crude steel output grew by 7.1% last year in the US to 86.2 million tonnes.

Annual crude steel production for South America was 48.4 million tonnes last year, with Brazilian output climbing 6.8% to 35.2 million tonnes from 2010. But like so many other economies, slowing demand saw growth ease in the second half of the year.

But for the 27-nation EU, the world second-largest steel producer, a different story with a steeper slowdown.

It produced 177 million tonnes of crude steel in 2011, 2.8% more than in 2010, when steel output jumped by almost 25%.

Second half production in the EU fell by more than 5% from the first half level and the fall was getting faster in the final quarter when demand usually picks up.

Weakening demand from the car and appliance industries, as well as from construction, allied with too much capacity, aggressive imports of basic steel and the financial strains in banking and credit markets will mean the EU steel sector faces a difficult 2012.

Italian output though was especially strong, with production up more than 20%, despite the economy's slowdown and the financial strains in the final five months or so of 2011.

In fact Italian crude steel output was up 11.3% in the year to 28.7 million tonnes. In contrast Spanish production dipped by more than 4% to 15.7 million tonnes

Japan is the world's third-largest steel producer after China and the EU, and production fell by almost 2% last year to 107.5 million tonnes, thanks to the impact of the March 11 quake and tsunami which saw some mills shut for a period of time and demand fall as the car industry cut output.

The strengthening yen over the year also made it more difficult for Japanese steel companies and their major car company customers (as well as Japanese shipyards) to compete with other Asian regions (China and South Korea in particular). Power shortages didn't help and higher costs generally saw manufacturers move abroad which further cut demand.

The high yen and the weak demand from car makers and others this year will further pressure the steel mills and demand for products like coal and iron ore from Australia.

South Korea is the other significant producer in Asia and it enjoyed a robust year with crude steel production hitting 68.5 million tonnes last year, up 16.2% from 2010 thanks to strong demand for cars and ships.

India saw a 5.7% rise in crude steel production last year to 72.2 million tonnes, against 68.3 million in 2010. Growth in output there also slowed into the second half as the economy dipped and demand came under pressure.

With economic growth expected to be less than 8% this year and facing a shortage of domestic iron ore, India could very well see a further weakening in demand and a possible fall in production in some months.

Steel production in the CIS grew by 4.0%, down from 11% in 2010.

It grew by 10.2% in South America and by 6.9% in the Middle East, but it fell by 13.8% in Africa, where political turmoil and violence in some key producing areas weighed on growth.

Australian crude steel production fell 12.2% to 6.4 million tonnes from the 7.3 million tonnes of 2010 as BlueScope Steel and OneSteel cut production. BlueScope also cut output after exiting the export market. But 2011 production was still higher than the 5.2 million tonnes of 2009 when BlueScope's major Port Kembla blast furnace was offline for months as part of a reline and upgrade.

Official Chinese government figures also show that growth in output of rolled steel slowed by 2.4 percentage points to 881.31 million tonnes, up 12.3% year-on-year.

The National Development Commission said China's imports of iron ore rose 10.9% year-on-year to 686.06 million tonnes last year, while exports of steel products amounted to 48.88 million tonnes, up 14.9%.

Steel prices continued to decline in December 2011, with the steel price composite index falling to 120.95 points, down 1.44 points from November. The index wavered between 130.74 points and 136.04 points in the first three quarters of last year, according to the Commission.

The latest official data shows the steel industry posted a combined profit of 295.2 billion Yuan ($US46.75 billion) in the first 11 months of 2011, up 29.9% year-on-year, although profitability did come under pressure in the second half of the year as demand slowed and costs rose.

For the month of December, world crude steel production for the 64 countries reporting to the World Steel Association was 117.1 million tonnes, up 1.7% from December 2010 and up 1.7 million tonnes from November. But that was almost 13 million tonnes under the record 129.97 million tonnes produced in May.

The crude steel capacity utilisation ratio of the 64 countries in December 2011 declined slightly to 71.7% compared to 73.3% in November 2011.

Compared to December 2010, the utilisation ratio in December 2011 is 2.1 percentage points lower.

That points to a sluggish first half of the year with iron ore and coal prices remaining under pressure, despite disruptions from weather in Australia and Brazil and uncertainty about the level of Indian exports.

Despite this uncertainty, mining companies report more interest from big global investors and significant buying as these groups seek to take advantage of low prices for the likes of BHP and Rio Tinto.

That's based on a belief that the world economy will do better than many official forecasters think: it very well might, but continue to watch Europe and Greece.