Economy

Tanners & Anton Discuss Consolidation, Imports & Steel Pricing

September 9, 2014

Steel Market Update featured Timna Tanners, Metals & Mining Analyst, Bank of America-Merrill Lynch, and John Anton, Director of Steel Services, IHS Global, at a luncheon presentation at the recent Steel Summit. The topic was commodity and steel forecasts and consolidation of the industry. As usual the two disagreed on some topics and sparked some discussion from the audience.

In her discussion on global pricing, Tanners began by describing a bull and bear case for sustaining pricing power. The bull case results from consolidation, trade cases, and discipline; the bear case from spare capacity, global pricing premiums, and temporary outages.

The recent sale of the ThyssenKrupp and Severstal assets are helping to consolidate the US steel market, said Tanners. In the flat rolled market there will be 8 suppliers, down from 12 with most of the supply in “three or four hands.” Further consolidations are likely with acquisition of Gallatin Steel at the foremost. Tanners suggested that more Russian divesture of US assets is possible, if suggestions that the Russian government is compelling companies to move out of the US are credible.

Tanners had several comments on trade cases and wasn’t afraid to use the word “protectionism” when talking about them. Tanners said it “was pretty amazing” that the trade case on OCTG was able to prove injury when the price spread is $300.

“We had a conference call with all of our steel analysts around the world,” said Tanners. “During the call the Russian analyst said that their market was weakening but in the third quarter exports should be good, Our Chinese analyst said business is weakening but exports for third quarter should be good. Our European analyst said business was weakening but exports for third quarter should be good.”

“Who is going to be importing that extra tonnage?” asked Tanners. “I guess the good old USA because we are a stronger market than elsewhere. But my point is, if we continue to restrict imports, we beg the question where do those tons go? I like the analogy of someone calling it to a game of Whack-a-Mole, but it is like John Ferriola said, it’s also a domino effect. So if they’re not coming from China, maybe they will come from elsewhere. If there is spare capacity looking for a home I don’t see why the US couldn’t continue to receive a decent amount of imports.

“Why else are we getting imports?” she asked. “I think because the US is charging a nice high premium versus the rest of the world on several products. I mentioned OCTG but you could say the same for flat rolled.”

Tanners commented that you can’t “trade case your way out of the global market.” Although the OCTG decision helped the stock market and sentiment, she is not sure there are many global market gains from such cases. In the US, the trade cases may contribute to sustaining prices in a bull market.

John Anton is forecasting global cyclical spikes for steel prices in the coming years. The spikes will be short but disruptive says Anton.

Global overproduction is creating a buyer’s market. Mill distress is evident in China where some mills are making profits but others have been losing money for years and are borrowing just to pay daily bills. The difficulty in getting loans has steel mills turning to shadow banking and the burden of debt will lead to shut downs. If capacity utilization goes down, prices go up, resulting in a restart of capacity which pushes prices back down again. “Any time in the next 5-10 years you see a significant price increase, it is going to be a spike.”

China’s steel growth is unsustainable. Although it is said that China never cuts production, even when prices get bad, they have actually done so three times in the past three years. Anton sees the government providing support for some mills, like Baosteel, but smaller mills will either be consolidated or shutdown—a win situation either way for China. Anton forecasts that Chinese production will be off line temporarily next year. Chinese capacity is around a billion tons per year, with 800 million tons of production and an 80 percent capacity rate. To clear the market, says Anton, they should be making 700 million tons or 70 percent capacity.

Prices will tend to stay in the middle range—good for buyers but not as good for the mills. However, it will “stop the construction of new mills and retards the digging of new ore mines,” says Anton. New capacity will held back and for the next 8-10 years, profits will remain weak and prices stagnate. Prices will rise with inflation.

The U.S. steel forecasts of the analysts are:

Tanners: Hot rolled $625/short ton, Iron Ore $95/metric ton with downside risk

Anton: Hot rolled $730-$740/ metric ton with a peak price of $750, Iron ore low to mid $90s/metric ton