Global steel demand in 2016 is expected to fall by 0.8%, following a 3% decline in the previous year, according to the World Steel Association’s short range outlook. That decline would confirm the generally gloomy prognosis for steel companies. But take China, which accounted for 44.8% of demand in 2015, out of the equation and the picture changes a bit.
Global demand ex-China is actually forecast to rise by 1.8% in 2016. The developed world is picking up some of the slack, after a bad year. The main work is being done by the Nafta (North American Free Trade Agreement) countries—the US, Canada and Mexico—where demand declined by 8.4% in 2015 but is expected to grow by 3.2% in 2016. Sure, a low base could also have helped. In addition, demand for steel in emerging economies ex-China is expected to grow by 1.8%.
The good news is that some parts of the steel consuming world are doing well but a major part, China, is not in good shape. Since China is also a major steel producer, it is happy to ship surplus steel to faraway lands even if it means hobbling prices everywhere.
That circle appears to be turning. Earlier in March, a steady and substantial increase in iron ore prices helped support steel prices too. Fears of that being a short-lived rally proved right when prices fell but they bottomed out in April. Imported iron ore into China is back at $60 a tonne. News reports say China’s steel producers are buying better quality imported ore instead of domestic ore. That is pushing up prices even as its steel production is declining.
Iron ore prices are a benchmark to set steel prices and when they increase, usually steel prices increase too. That in turn benefits steel companies worldwide. It would be hazardous to assume this happy state of affairs will continue all through 2016. The risks can be an increase in the supply of iron ore/steel or slower-than- expected economic growth in the countries forecast to pull up steel demand.
For now, steel producers seem to be in a better place than they were in 2015. Indian companies are already seeing some benefits of rising prices and domestic measures to protect them from cheap imports. That has resulted in their shares steadily rising in the latter part of the March quarter. The first test for these rising expectations will be their financial results for the quarter.