BHP Outlook on Steel & Pig Iron Prospects
Australian mining giant BHP said Global crude steel production will decline in the 2020 calendar year, with solid growth in China offset by a steep fall in the rest of the world. Steel production is expected to decline by six per cent for crude steel and between three per cent and four per cent for pig iron. Our preliminary assessment for the 2021 calendar year is for a percentage increase of similar magnitude to the 2020 contraction, with pig iron lagging somewhat as rising scrap availability and lower scrap cost restore the competitiveness of production from the electric arc furnace fleet. We anticipate that global steel production will expand slightly faster than population growth in coming decades, with a plateau and then slow decline in China offset by growth in the developing world, led by India. Growth in pig iron production will trail behind the growth in steel, principally reflecting higher long term proportion of steel sourced from scrap.”
BHP said “Global crude steel production had become extremely unbalanced from a geographic perspective prior to COVID19. In calendar 2019, China had expanded by around 8.25 per cent and the rest of the world had contracted by around 1.5 per cent. The gap has widened further under COVID19, with China on track to increase production moderately in calendar 2020, while ex China output is expected to decline by a double digit percentage. In calendar year 2019, Chinese production rose to just shy of the one billion tonne mark at 996 million tonne. The approximate 2 per cent growth we project for calendar year 2020 will see reported annual production move comfortably above that mystical nine zero level.”
BHP said” China’s blast furnace utilisation rate increased from around 80 per cent in February 2020 to well above 90 per cent in June. Along with a 50-60 percentage point swing in electric arc furnace utilisation (from a low of 12 per cent to around 60-70 per cent), that has led to a stunning crude steel run rate of 1,117 Mtpa in June 2020 (+4.5 per cent YoY). Year–to–date annualised production of 1,004 Mt to June is broadly consistent with our base case. Pig iron is expected to grow slightly faster than crude steel in calendar 2020, reflecting constrained scrap availability for Chinese EAF mills. The steel/pig iron relativity is then expected to reverse in calendar 2021, as scrap availability normalises, possibly assisted by a shift in import policy.”
BHP Said “Finished steel inventories built up quickly in the March quarter as blast furnace operations consciously produced in advance of demand, trusting that sales would pick up when the lockdown was lifted. This faith proved to be well placed, as finished inventories at mills fell swiftly though the June quarter as the various segments of downstream activity improved in sequence. The market for long products rebalanced most quickly, with daily rebar transactions well above normal seasonal levels for much of the June 2020 quarter. However, better than expected outcomes for domestic machinery and auto production have narrowed (but not fully closed) the gap between long and flat product performance seen early in the year.”
BHP added “The unique circumstances of COVID19 have altered a number of fundamental relationships across our commodity suite. In Chinese steel, the relationship between capacity utilisation and profit margins has been impacted. Profit margins have been slim this year despite the sharp increase in utilisation, with higher input costs and the large inventory run–up described above (+30 per cent YoY for mills plus traders) are two key reasons for that disconnect. With the rebasing of the official capacity utilisation estimates earlier this calendar year, our own estimate of China’s long run equilibrium crude steel capacity utilisation rate is under review. Turning to the long term, we firmly believe that, by mid century, China will almost double its accumulated stock of steel in use, which is currently 7 tonnes per capita, on its way to an urbanisation rate of around 80 per cent14 and living standards around two thirds of those in the United States. China’s current stock is well below the current US level of around 14 tonnes per capita. We estimate that this stock will create a flow of potential end of life scrap sufficient to enable a doubling of China’s current scrap to steel ratio of around 20 per cent by mid–century.15. The exact path to this end state is uncertain. Among the range of possibilities we consider, our base case is that Chinese steel production has entered a plateau phase, with the literal peak to occur no later than the middle of this decade. Our low case16 for China, which underpins our global view on steel making raw materials, assumes that the peak year is contemporaneous. The industry is then assumed to immediately embark upon a multi decadal decline phase in the annual output of both steel and pig iron, highlighted by an even more aggressive long run scrap to steel ratio increase than the doubling outlined above.”
BHP said “Steel production outside China collapsed under the pressures of the Great Lockdown, with a double digit percentage decline across calendar 2020 in prospect. Across the June quarter, at some point of which all major ex China economies were in lockdown, utilisation in this group fell to between 50 per cent and 60 per cent, versus the norm of around 75 per cent in recent years. In the calendar year to June, India’s crude steel output fell by 24.2 per cent while pig iron output fell by 19.4 per cent YoY. In the same period, Japan, Europe and South Korea contracted by 17.4 per cent, 16.4 percent &9.5 per cent (YoY respectively. Note that the exposure to indirect exports of these three regions (with Germany as a proxy for Europe) sits between 14 per cent and 19 per cent. The Developed Asian producers are also highly exposed to direct exports, at 31 per cent and 20 per cent of production for Japan and South Korea respectively, versus a trivial 1 per cent for Germany. The stark dichotomy between China and the rest produces a weighted global crude steel run rate for January-June 2020 of minus 6.0 per cent”
BHP concluded “Despite this tentative improvement, the full year global outcome for calendar 2020 is expected to be similar to the year to date actual, at close to minus 6 per cent for crude steel, and between minus 3-4 per cent for pig iron. Our preliminary thinking on calendar 2021 is for a percentage bounce of similar magnitude to the 2020 contraction in crude steel, with pig iron lagging somewhat as rising scrap availability and lower scrap cost restores some competitiveness to the EAF fleet.”
Source : STRATEGIC RESEARCH INSTITUTE