In the late 1990s there was a major resurgence from the previously moribund economies of Brazil, Russia, India and China, or the BRICs as they are known. Before this, consumption and production of steel was growing at only modest rates and most was consumed in developed nations. A lot of the steel industry around the world was fragmented; had little apparent potential for growth according to some; and, being state-owned, typically lethargic and not proactive.
All these factors are supported statistically. The steel production curve from 1970 to around 1998 was pretty flat at around 750 MMt/a, whereas in 2010 it is over 1,300 MMt/a.
There are a few key elements worth noting:
- BlueScope Steel makes about 8 MMt/a of steel. This makes the company a big player in its own patch, but relatively small in the global context;
- The massive influence of China since the late 1990s, both on consumption and production;
- How the global financial crisis (GFC) has heavily impacted developed economies whereas the BRIC economies have been relatively less affected; and,
- Global steel production has grown dramatically since 1998. About 500 MMt of capacity has been added, which is equivalent to an additional 100 Port Kembla Steelworks and approximately a trillion dollars of additional investment.
Consolidation of global steel producers
Since 2003 there has been considerable consolidation in the higher producing end of the steel industry. China has been a noticeable mover in this area, with five of its steel producing companies in the world’s top ten producers, whereas in 2003 only Baosteel was in this group.
Interestingly, considering its once great reputation as an economic powerhouse, the major Japanese steel mills have been pushed down the rankings somewhat. Tata Steel, an operation out of India, has also stepped up, so developing countries have really come to prominence during this period.
In 2009, “˜little’ BlueScope Steel ranked 45 globally. This was partly due to the company doing a planned cut-back on iron production in that year due to undertaking a blast furnace reline. The company has increased production again now, but nevertheless is still well down the list from a global point of view.
Steel industry fragmentation relative to raw material suppliers
Compared to some other industries, steel is a heavily fragmented industry. In 2008, the top ten steel producers only made 28 per cent of the globe’s steel. If Chinese steel producers are removed, the top ten actually contribute 40 per cent.
The fragmentation of the industry becomes stark when compared to the iron ore and coal mining industries:
- The top three companies in the steel industry control 13 percent of global steel production.
- The top three companies in the iron ore industry control 69 percent of global iron ore production.
- The top three companies in the coal industry control 41 per cent of global coal production.
Pricing of raw materials: a major change
A critical dynamic of the steel industry in the global context is the fundamental shift that is occurring in iron ore pricing. It has been described as a global iron ore price revolution.
Raw materials, with iron ore chief amongst them, account for 60 per cent of the cost of steel. Therefore any changes to the pricing structure (and prices) of iron ore will impact on the price of steel.
Ten years ago the price of iron ore was $US20/t. In June 2010 it was $US140/t. That is a 700 per cent increase in ten years. And as BlueScope doesn’t mine or sell iron ore like the company did when it was owned by BHP, there is little it can do about this price increase. BlueScope’s competitors around the world are faced with the same situation.
Until recently, iron ore (and coal) prices were set annually. There was therefore reasonable visibility of the cost base of steel going forward. That is no more as the world is now in the process of moving to a more frequent approach to iron ore and coal pricing – from annually to quarterly. This will mean steelmaking costs will be considerably more volatile than in the past, and because raw materials make up such a large part of steel’s cost base, steel pricing is likely to be similarly volatile. This is going to present a significant challenge for BlueScope and its customers because the lead times for major pipelines extend beyond the quarterly time horizon.
BRIC versus the rest of the world: crude steel production
The steel industry has evolved to an astonishing degree since the late 1990s. After a relative production flatline for three decades, production has leapt.
Another interesting aspect of production in the context of the GFC is the way in which the BRIC countries didn’t pause too much for breath, even when the GFC did arrive. And once the BRIC countries are taken out of total global steel production, the world’s developed nations, in terms of steel production, are still showing a very flat trend.
Of course, it is China that is the real engine behind the BRIC country statistics. It is becoming the dominant steel producing nation in the world. It produces about 568 MMt/a of steel now, coming from next to nothing 30 years ago.
In the space of about 10-15 years, China has developed the equivalent of about 100 Port Kembla Steelworks. This is a remarkable level of growth in an industry that was previously seen as lethargic and conservative with very few growth prospects.
In addition to China clearly becoming the largest steel producing country in the world, it also has a very high consumption. This is being driven largely by rapid population movement – 20 million people per annum – from the interior of China to its coastal areas. That’s the equivalent of Australia’s population moving location every year. This is driving the need for infrastructure development, and therefore the need for steel, in the big cities.
Comparative steel consumption
Over the long haul, Australians have been consuming about 200-300 kg of steel per person per annum China has climbed to about 400 kg per person per annum. India, generally posited as “˜the next big thing’, has also been growing in terms of consumption, but it is still only consuming less than 50 kg of steel per person per annum.
The developed countries’ appetite for steel is relatively stable, but it has stalled. Conversely, it is likely countries such as India will increase consumption. China will continue to grow strongly in the short to medium term but will eventually stabilise as its infrastructure reaches a more mature stage of development.
The global steel scene is undergoing a dramatic change. In partnership with its customers, BlueScope is ready to meet the challenges this presents. The issue of raw materials pricing will affect all its market sectors, so the company must be innovative in the way it prices its products to continue to be competitive. Being responsive to its customers is of paramount importance to the BlueScope business.
This article is an edited extract of a speech given by Bernie Landy at the recent APIA Sydney Dinner. The article is BlueScope Steel’s perspective on the global steel industry. It shares insights into the industry’s evolution and factors impacting both on the broader global economy and the Australian pipeline industry specifically.