Global steel demand poised to grow along with GDP

by Tony Taccone on December 18, 2007 in Articles,Data,Geography Until a few years ago the steel industry was considered mature, and the moniker was accurate. Global steel demand grew more slowly than did the worlds population. In much of the developed world, demand for steel was stagnant after having gone through a long period of decline. Since 1998, however, the steel industry seems to have re-ignited its growth engine and kicked into a new gear. The industry has been growing at 6% annually and most analysts see strong growth continuing for a decade or more. What explains the steel industrys reemergence and can it continue? Although there are a number of underlying drivers which explain the renewed vigor of the industry, the simplest explanation is GDP growth. After growing by an average of 3.5% for almost 3 decades, global GDP growth averaged 5% from 2004 through 2007. This increase in the global growth rate has had a very positive effect on the demand for steel and other commodities. World GDP Growth 1975 to 2007

Sources: IMF, Angus Maddison So, what explains the increase in global growth rates and how does increased GDP growth translate into greater steel demand? While there are a number of factors at work, a few graphs illustrate the point fairly well. First, for a variety of reasons, emerging economies grow faster than developed economies. While this has been true for a long time, the difference has become more pronounced recently, as the large populations of the BRIC countries have emerged as economic powers.

GDP Growth Rates: Developed vs. Emerging Economies

Source: IMF World Economic Outlook The rapid growth and sheer size of the BRIC economies has been shifting the balance of global economic power. From 40% in the mid 1990s, the faster growing emerging economies now account for close to 50% of global output. Developing Economies Share of Global GDP

Source: IMF World Economic Outlook With 50% of the world growing at over 7% per year, the global economy has a strong wind at its back. This explains the rise in global GDP growth from 3.5% to 5% annually. But is this enough of a change to explain the re-emergence of steel as a global growth industry? We think it is. Not surprisingly, steel demand and GDP growth are positively correlated. The graph below plots the relationship from 1950 to 2006. Whats most important about the graph is the slope of the fitted trend line, which suggests that small increases in GDP growth lead to significant increases in steel demand growth. In fact, this historical data suggest that for each 100 basis point increase in GDP growth (for example from 3% to 4%), the annual rate of steel demand

growth increases almost four times as much. So yes, the relatively small increase in global economic growth, from 3.5% to 5%, does help explain why the steel industry has been growing at 6% per year. Global GDP Growth vs. Global Growth in Steel Demand

Sources: IISI, IMF, First River But can the global boom in steel demand last? For a couple of reasons we think it can. First, while there are risks in the global economy, the credit crisis in the US being one of the more worrisome, the latest forecast from the IMF (namely the World Economic Outlook) is fairly bullish. Global GDP is expected to continue growing at around 5% annually through 2012. Given the historic relationship between GDP and steel demand this would suggest the global steel market will grow by at least 5% annually through 2012. Since steel demand has grown steadily since 1998, this seems an aggressive forecast. Can a cyclical industry sustain growth rates of 5% for over a decade without a cyclical downturn? We think it can because its done so in the past. From 1950 and 1975, global GDP growth averaged 4.8% annually and steel demand grew at 6% per year. More important, during this period there were only four years when steel demand shrank from one year to the next. Steel demand is not really as cyclical as we have come to believe. It just happened to have gone through a particularly difficult period during the 1980s and 1990s. The implication of the logical relationship between GDP growth and steel demand is clear. The global boom in the demand for steel and other commodities is a natural by-product of economic development and faster global GDP growth. If the economic forecasters are right and we are in for an extended period of 5% global GDP growth, the steel market should remain buoyant for a decade or longer.

2009 GDP forecasts and steel demand growth

by Tony Taccone on February 2, 2009 in Articles,Data,Nerds Only The International Monetary Fund recently updated its global GDP growth forecast for 2009 and 2010. Not surprisingly, the growth projections were revised downward. So I thought Id take the opportunity to update the graph showing the relationship between global GDP and steel demand and to refine the comments I made in a recent post using the previous IMF forecast. As the graph makes clear, the IMFs 2009 forecast of 0.5% global GDP growth is dire. In fact, 0.5% global growth would be the worst showing since 1950. (The graph shows data from 1950 to the present). If accurate, the IMF projection suggests global steel demand will fall by around 8% this year, not a pretty picture. While on the topic of the relationship between GDP growth and steel demand, I also want to respond to a question posed by a reader in response to one of my previous posts on this subject. Gopal wants to know whether Ive looked at the relationship between GDP growth and steel demand in the US and if so whether there is a positive correlation between the two. The answers are yes and yes, and the data appear in the following graph. As you can see, the correlation is positive and the r-squared is quite strong at 0.62. I plugged in the IMFs latest forecast for the US, which has GDP down 1.6% for 2009. The trend line suggests that steel demand in the US will fall by 15% to 20% this year. Of course GDP is, by definition, a very broad measure of economic activity. If you really want to understand how steel demand in the US is likely to evolve over the next few years, we have found, not surprisingly, that automotive production and non-residential construction are more useful variables. But as they say, thats a whole nother can of worms

ASEAN steel consumption continued to grow up According statistics to released by the Southeast Asia Iron and Steel Institute, by the strong growth of manufacturing and construction to promote the 2011 ASEAN apparent steel consumption exceeded 50 million tons for the first time. Including Indonesia, Malaysia, Singapore, Vietnam, Thailand and the Philippines, six major economies, including ASEAN apparent steel consumption totaled 50.5 million tons, an increase of 4%. Last year, the steel consumption in Singapore, Thailand, Indonesia and the Philippines are growing.

Per capita steel consumption will usually grow with the economy as a whole, the ASEAN economic growth means that ASEAN steel market, there is still much room for growth. Southeast Asia Iron and Steel Institute estimates, driven by strong economic growth, the 2012 ASEAN steel consumption will maintain a growth rate of 7% -8%.

Potential for growth of the ASEAN countries, has become an important export destination of China's steel. Become a very important factor in the field to promote trade exchanges in the international seminar held last year, representatives from ASEAN. According to analysts, the average annual growth rate of the ASEAN countries, steel demand in the next few years is estimated at 6%, market demand continued to grow in Vietnam, Thailand, Malaysia, Indonesia, the Philippines and Singapore. Vietnam steel consumption grew the fastest.

The data show that Southeast Asia in the next five years, steel consumption structure will also produce a significant change, driven by plate consumption proportion to increase due to increased production of local cars and household appliances,. Steel types from the point of view, the proportion of hot rolled coil consumption in Southeast Asia from 44.1% to 36.8%, the coated sheet rose from 17.3% to 24.1%.

Packaging galvanized sheet, color coated and coated board, coated sheet, including an average annual demand growth rate will reach 9.1%, an increase of 4.9 percent over the same period of hot rolled coil.

ASEAN also hope to share the successful experience of the Chinese iron and steel industry, and through joint seminars, professional and technical training, and enhance the technical capacity of the ASEAN iron and steel enterprises in the aspects of product development, manufacturing and production operations.

banian Minerals: Economic growth in Germany and France is driving up steel demand and prices in EU. Germany's unemployment fell more than expected in April to a near two-decade low, adding to signs of strength Germany is driving the economy in Europe and global economy other will benefit from that Germany's economy is supported by strength in export-driven industrial production. Growth in domestic demand has risen i Germany as unemployment has declined. Germany has recovered faster than other European Union countries from its deepest recession . Germany's export-driven industrial output rose this year. European export-driven industrial services accelerated in April, driven by higher output in Germany, France and England. Albanian Minerals is forecasting that steel consumption in Europe Union to grow by 5 per cent to 152 mt in 2011. Steel industry in 2010 saw global output total 1,412 million tonnes, 15% up on 2009 and 5% higher than the previous peak reached in 2007

The largest economy in euro zone countries like Germany and France are forecast to have a solid recovery in economic growth. Germanys crude steel production totaled 11.39 million tonne s in the Q1 2011, soared by 4.2% Italys steel output in Q1 2011 rose 8% to 7 million tonnes in the first three months of 2011. Albanian Minerals President Sahit Muja said " World steel demand will reach a new record of 1,500 million tons in 2012. Chrome ore, iron ore and coal prices are expected to increase Q3- Q4 2011 and continue to 2012. Price increase is due to the high cost many miners strive to maintain the existing chrome ore production capacity. Devaluation of dollar, labor costs plus the cost oil led to a substantial increase in costs of chrome ore, iron ore and coal production. Demand for high quality, iron ore, coal and chrome ore will continue to grow in 2011 . Due to the increases in the row materials prices and production and transportation costs prices of steel will go up. Chrome ore, chromium is used in stainless steel, imparting it with a high resistance to corrosion and its shiny appearance. Chrome ore is converted to ferrochrome, which is used in the production of stainless steel. There is no substitute for chrome ore. Mehmet Muja Statement by Mr. Risaburo Nezu, Chairman of the OECD Steel Committee at the 62nd meeting of the Steel Committee, Istanbul, Turkey, 17-18 May 2007 World Steel Markets Enjoying Sixth Year of Strong Growth Driven by buoyant steel-intensive economic activity including construction and infrastructure building in many developing economies, global apparent consumption of steel has increased at an average pace of more than 7 percent per annum since 2002 to reach a record level of 1.113 billion tonnes last year. To meet this rise in demand, steel production growth has accelerated sharply, reaching 1.24 billion tonnes in 2006, up by as much as 393 million tonnes (or 46%) compared to its level of 850 million tonnes in 2001. This growth in demand for steel is creating a favourable situation for many steelmakers. Steel prices and the prices of some raw materials in some markets are two times higher or more compared to levels prevailing in 2001. Profits of steel companies are, for the most part, strong, and restructuring and consolidation have further strengthened the steel industries of many economies. Favourable outlook for steel demand

Chinas apparent crude steel consumption has doubled over the last five years to reach 398 million tonnes in 2006. The economy now accounts for around 32 percent of the worlds apparent steel consumption. The rapid expansion of Chinas industrial production and its strong urbanization trend will ensure that steel consumption

continues to rise, though growth should moderate slightly in coming years from the double-digit rates observed in recent years. In India, there is enormous potential for growth in steel consumption. Heavy investment in developing the countrys infrastructure, such as railways, ports, and roads will fuel growth in the steel-intensive construction sector. In Russia, steel consumption prospects are favourable, supported by the consumer boom, which is now spreading to automobiles and housing, as well as the replacement of ageing infrastructure. Brazilian demand for steel will continue to be supported in the future by the countrys automotive and construction sectors. Steel consumption in the Middle East is expanding rapidly from a relatively low level of 37 million tonnes. Massive infrastructure and other building activity is driving this development. In NAFTA, housing market problems and a slowdown in manufacturing activity in the U.S. could contribute to a reduction in steel consumption this year from around 155 million tonnes in 2006, while a recovery in demand could take place in 2008 as economic growth reaccelerates. Steel consumption in the EU-27 is expected to stay on a gradual growth path in 2007 and 2008, thanks to the relatively healthy outlook for domestic as well as external demand for products manufactured in steel-using industries.

Sharp acceleration in global steel production

World production of steel has posted a dramatic acceleration in growth over the last five years. China accounted for more than two-thirds of the increase in world steel production seen over the last five years, i.e., Chinese production surged from 151 million tonnes in 2001 to as much as 423 million tonnes by 2006. As a result, Chinas share of world production nearly doubled over the past five years, rising from 17.7 percent in 2001 to 34 percent by 2006. In India, the worlds seventh largest producer of steel, production reached 44 million tonnes in 2006. In the future, Indian steel production capacities and volumes are expected to increase strongly in order to meet demand for steel from a growing industrial sector and expanding infrastructure building. Russian steel production, which grew from 59 million tonnes in 2001 to 71 million tonnes in 2006, is expected to increase steadily over the next few years, supported by growing electric-arc furnace capacity that will gradually replace the outdated open-hearth process. The rest of Asia (excl. China), NAFTA and the EU-25 have seen their shares of world steel production decline over recent years. Supported by strong Chinese demand for high quality steel products, Japanese crude steel production reached 116 million tonnes in 2006, its highest level recorded since the early 1970s. U.S. crude steel production has increased from 90 million tonnes in 2001 to around 99 million tonnes last year driven by electric-arc furnace production. Crude steel production in the EU25 rose to 198.5 million tonnes last year. Growth has been slightly faster in the new Member States, though from a much lower base.

More consolidation to come

Consolidation in the steel industry is likely to continue and is now taking on a global dimension, driven by an increased desire to produce steel near major consuming markets, yet maintaining basic production in low-cost regions near raw materials. Such consolidation may help the steel industry to smooth production cycles and, absent trade and market-distorting practices, could promote the long-term profitability of steel making operations.

Global steel industry faces important challenges Despite the exceptionally favourable market situation, the steel industry faces significant challenges that may affect its long-term viability. Such challenges include:

Trade issues. Steelmaking capacity is increasing rapidly in developing economies. If demand slows in these dynamic economies, the risk of heightened trade frictions will increase. Environmental concerns. Steelmakers need to address emissions control and other pressures for environmental protection while ensuring their cost competitiveness. Distortions in international competition will remain a concern. Energy and raw material availability. Rising steelmaking capacity, export restrictions, investment barriers, and infrastructure problems in some raw material markets may exacerbate the scarcity of raw materials and lead to higher prices. Skills. A large share of the labour force of steel industries will be eligible for retirement over the next several years particularly in more advanced economies. Given rapid population ageing in these economies, the available pool of new workers for the industry will be smaller than it is now. Workforce training and development issues will need to be addressed.