Thanks to China, markets are at a crossroads in 2006

Staff -- Purchasing, 2/16/2006

World steel market competition stemming from "excessive output" by Chinese manufacturers will likely intensify in 2006, says an analysis by research consortium Best Independent Research (BIR) of Chicago. The researchers believe "the U.S. will need to implement its trade regulations more effectively and might again set a ceiling on steel imports" to offset an expected decline in world steel prices.

The steel industry has posted impressive performance over the last two years. In 2004, global steel consumption increased by 8.8% from 2003 to reach nearly 935 million metric tons. Companies within the highly fragmented industry are consolidating and firms are diversifying geographically to tap into newer markets and lessen business risk.

Most industry players are looking to diversify both geographically and in products offered. There has been a mating dance underway for weeks between Dofasco of Canada and rival suitors Arcelor of Luxembourg and ThyssenKrupp of Germany. Meanwhile, the world's largest manufacturer of steel, U.K.-based Mittal Steel recently acquired nearly 93% of Ukraine-based Kryvorizhstal, the largest producer of carbon steel, for $4.8 billion in November 2005. Not to be left behind, North American firms are also focusing their efforts on joint ventures and capacity expansion. In December, AK Steel announced a capital investment of approximately $8.5 million in its wholly-owned subsidiary, AK Tube. This injection of capital will be used to manufacture stainless steel tubing with large diameters to enable truck manufacturers to meet new emission regulations.

The BIR analysis says the global steel markets are at a crossroads with China, an importer of steel until last year, now becoming a large exporter of the metal. "China's emerging position as a net exporter of steel is seen as an interesting development in the steel market," notes the BIR analysis. "The country, which already has a capacity to manufacture in excess of 450 million metric tons of crude steel, is set to raise this figure to 500 million metric tons by the end of 2006." This could lead to an oversupply in global steel levels and, consequently, lower world steel prices.

China's annual steel production has increased from 297 million metric tons in 2004 to an estimated 360 million in 2005. However, growth in Chinese demand for steel has fallen to 6% from more than triple that amount last year. The result is overcapacity within the Chinese market, leading to global pricing strains. In December 2005, the world's fifth largest steel manufacturer, Korea-based Pohang Iron and Steel Co. (better known as Posco), stated that it would reduce domestic prices of its steel products by up to 17% in 2006. This price reduction was in response to China-based Baosteel's intention to slash prices by 10% this year.

The global oversupply will also impact the fortunes of U.S. steel companies, BIR's analysis suggests. This is because Chinese hot-rolled steel sheet priced at $400/net ton in December and January was $200/ton lower than the same product rolled in the U.S.