Steel: emerging markets re-emerge in 2012

Steel: emerging markets re-emerge in 2012

 With the release of December’s crude steel output by worldsteel, we now have a full dataset for
2011. History will show this to have been an unusual year for global steel, with surprising strength
in developed economies while many emerging market peers suffered. We see 2012 as a reverse,
with developed world consumption pulled down by Europe while India and Brazil return to growth.
Meanwhile China, while slowing, is still growing and continues to follow the path of other
precedent industrial powerhouses of their time.

 December output in itself was unsurprisingly weak, with annualised output dipping below 1.4bn tpa
for the first time in 2011 for the countries reporting to worldsteel. While China did show a small
MoM gain, ex-China dropped 4.1% sequentially, though remains 2.6% up YoY. Indeed, this rate
accelerated from November’s 2%, such that – as with recent months – the ex-China output trend
is tracking 2010’s movements at a slightly higher level. However, a 12.8% MoM output drop in
Western Europe and 6.6% in Japan mean these areas are both now in negative YoY territory.
However, we do not expect to see global output dip further from this point, and believe apparent
demand looks to have bottomed.

 After adding our estimates of countries not reporting to worldsteel and revising figures (i.e. for
Chinese underreporting in 2010) we get 6.1% steel apparent demand growth in 2011, with total
consumption of 1,509mt. We expect 2012 to mark much slower growth rates, but maintain a 4.3%
YoY rise, taking consumption to 1,574 million tonnes. This rate remains above the 30-year
average of 3.1%, but is low in terms of the last 15 years.

Macquarie crude steel apparent consumption estimates

 As ever, China is set to be a key driver of growth for steel, given its base of 43% of global
consumption in 2011. There is no doubt that early 2012 demand is relatively weak, with the key
steel consuming pillars of real estate and infrastructure underperforming. However, we feel that
as the lagged effect of moderately looser monetary policy works through the system coupled with
an expansion of downstream margins, so steel consumption growth will push higher through the
end of Q1 (which will be negative YoY). With this, we expect a mirror of 2010, and expect
consumption to grow 7.7% YoY to 706mt. We reiterate that China continues to follow the
kg/capita path of the other industrial powerhouses of their time (Fig.5), and while moving to a sub-
GDP growth phase, is set to continue growing at an ever lower pace in the coming years.

 The big disappointments in 2011 were the big emerging market economies of India and Brazil.
While Russia, bolstered by a high oil price, posted a large 22% gain in apparent consumption,
India dropped 1.4% and Brazil 7.5%, as a fight against inflation followed by capital outflows hurt
steel consuming sectors. With inflationary pressures easing and governments keen to bolster
capital investment, we expect this to turn around in 2012 with growth rates (albeit still sub-par) of
6.5% (India) and 4.5% (Brazil). Helped by high single-digit growth in places like Indonesia and a
return to a degree of normality in the Middle East and Africa, this should lead to 23mt of growth
from ex-China emerging markets in 2012, or 35% of total growth, the highest since 2007.

 Given the arrival of austerity, we expect the current drop in European steel output to be sustained
through 2012, and see a 6% YoY decline in Western European consumption. In our view, the
early 1980s offer a good precedent for where EU consumption might settle in an austere
environment, which is circa 10% below current levels. While the US and Japan may show low
growth, we expect the developed world overall to have negative steel consumption in 2012, and
struggle to recover during our forecast period.

 With global steel prices slipping from a peak in Q1 2011, so trade volumes have followed, though
they remain in positive YoY territory. However, we do expect to see a further lift into 2012. Firstly,
the current pick-up in US HRC pricing and resultant import arbitrage should attract greater trade
flows. Secondly, the inability of emerging market economies to build suitable steel capacity
should again cause their relative net imports to rise – India is certainly one to watch in this regard.

Summary of iron and steel production in 2011