ArcelorMittal Profit, China Steel Exports Causing Concern

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By Stuart Burns

The slowdown in the global steel industry could not be more aptly illustrated than in reviewing the most recent results of the world’s largest steel company, ArcelorMittal (NYSE:MT).

The firm has slid into a third-quarter loss of $709 million, compared with a net income of $659 million for the same period last year, an FT article reports. Not surprisingly, given the underlying economic situation, Europe leads the fall with flat-rolled products chalking up a total operating loss for the first nine months of $823 million compared with a net income of $245 million for the same period in 2011.

The runes are not good for the year ahead, as global steel growth slows further; the World Steel Association is quoted as reporting its forecast growth this year to be revised downwards to 2.1 percent, compared with a forecast of 3.6 percent made in April. Last year, global steel demand rose 6.2 percent.

More disconcerting for the steel industry, perhaps, is the prospect of a rise in Chinese exports as steel demand growth slows in China.

A recent FT article reported the growth of China’s economy slowed for the seventh consecutive quarter to 7.4 percent from a year earlier, but industry figures suggest China’s steel demand has slowed even more dramatically, and is set to expand by just 2.5 percent this year.

The concern is that if stimulus measures do not prompt a pickup in construction, cash-strapped steel mills may seek to push more products overseas. China’s total steel exports rose by 10.2 percent in the first nine months of this year compared with the same period last year, reaching 41 million tons, or roughly 8 percent of total output. At the same time, imports dropped to 10.5 million tons, down 12 percent.

China’s Asian Steel Trade Partners: Hurtin’

So far, Asian economies have felt the brunt of the turnaround. South Korea imported 6.6 million tons of Chinese steel during the first eight months of this year, with other Asian destinations such as Vietnam, Thailand, Singapore and the Philippines taking a further one million tons. Korea is also one of China’s steel trading partners, so the balance of trade in steel products has moved dramatically against Korea this year while the fear is the situation could get worse.

China is such a massive presence in the steel market relative to its neighbors that even a relatively small change for China becomes a major impact for its trade partner. As Sajjan Jindal, chief executive of JSW, one of India’s largest steel producers, is quoted as saying, “…if China decides to export just 10 million tons a year in here, the Indian steel industry could be crushed.”

Some hope that China’s relatively costly steel production will make mass exports unattractive, especially into depressed overseas markets where prices are already low, but others fear subsidies and state support will allow steel producers to maintain output at near record levels even as domestic demand continues to weaken, encouraging them to export more and import less to the detriment of steel producers — not just in Asia, but globally.

The cost of shipping to distant markets in North America or Europe is held up as one barrier to a major surge in volumes, but with sea freight rates also depressed $50-60/ton for shipping to Western markets, does not represent an insurmountable obstacle if other incentives such as VAT rebates or power subsidies were to encourage steelmakers to maintain production and hence employment.