Goldman Sachs Group analysts believe that global steel markets will remain in a tight supply/demand balance for some time to come because of “recent fast growth in demand relative to limited growth in supply.”

Analyst Sal Tharani at Goldman Sachs' New York offices writes to clients that “over the last few months, global demand has exceeded supply, creating a shortage of steel.” He then suggests that this scenario could continue for through 2017.

There have been what Tharani calls “new pockets of demand” expanding in the Middle East, BRIC countries of Brazil, Russia, India and China and other emerging economies which are pressuring the 1.5 billion metric tons of global supply. This will sustain high global stele pricing, he says, because of “high raw material input costs and the higher expenses and longer leadtimes associated with adding new steelmaking capacity.”

Goldman Sachs expects the world demand trend to remain strong and pressure production to 2.6 million metric tons by 2017. However, Tharani says he is “quite certain that the forecasted 450-500 million metric tons of new steelmaking capacity needed to meet this demand trend will be difficult to bring on line over that 10-year period, and may fall well short of that target.”

“The emergence of China as a global growth engine has changed this since the beginning of this decade.” Upshot: Over the past seven years, global steel production has grown by around 7%, primarily due to unprecedented demand in China and, lately, the other BRIC and developing countries.

Looking ahead, Tharani writes: “Between BRICs and other emerging developing countries, more than half of the world population is going through a growth phase, which will require immense amount of steel, in our view. Steel demand growth rate in a country is the highest when a nation is in a rapid developmental phase. Generally the biggest spending in this phase is on infrastructure build up which could include housing, roads, bridges, water and sewage systems, communication networks, airports, etc. Although there is increasing demand from industrial and consumer durables as well, construction and infrastructure sectors are the biggest source of steel demand. Steel obviously is an important input in developing these sectors.”

Tharani forecasts that the bulk (about 85%) of new steel production capacity, or 480 million metric tons, will come from the traditional blast furnace process (integrated steel mills), which uses iron ore and coking coal as input materials. China will continue to increase its steel capacity, albeit at a lower rate than the past 7 years.

So, it will remain dependent on imports of iron ore to feed its growing steel capacity, in our view. India and Brazil, which are both rich in iron ore, are also expected to increase their steel capacity considerably over the coming decade.

Tharani says most steelmaking firms worldwide will be reluctant to put large greenfield projects using electric-arc furnace (EAF) technology, due to limited availability of scrap.

Even Nucor, which has expanded its scrap supply base, recently announced a pig iron greenfield project, which could potentially be expanded into a full-blown integrated steel mill in future. Steel Dynamics and Commercial Metals also have boosted scrap-supply.

Tharani's analysis says rising steel production will continue to put price pressure on input raw materials of iron ore, coking coal, scrap. “It will be tough for raw supply to meet the expected demand from the steel industry, and thus, prices of raw materials should rise further, or at least remain strong,” he writes.

“Steel manufacturers who are integrated upstream and control their raw material resources or those that are strategically positioning themselves to get more self sufficient, will have a competitive advantage against their peers.”