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Time for solutions: world steel market in times of global economic crisis
(translation from the Russian edition)

Alexander Siryk
Research & Consulting Group AG

Global steel market has been dynamically developing in the last decade.
Thanks to growing demand, steel output over 1997-2007 almost doubled
worldwide and according to the World Steel Assn data reached 1,344 mmt (CAGR
estimated at 5%). Chinese metallurgy contributed the most to these rising volumes
and accounted for nearly 70% of the steel production growth in the world. By and
large, almost 80% in the expansion should be attributed to Asia.
Steel makers in other regions also enjoyed the trend – production indicators
(CAGR) were growing by 3-6% each year. The only exception was North
America, where steel cast volumes did slightly increase – from 129 mmt in 1997 to
133 mmt in 2007.
Buyers’ activity boom and skyrocketing prices of the first half of 2008
maintained the confidence that positive market trends would continue and new
records were approaching.

Belated response
Up till the very end of Q3 2008, production figures had been suggesting that
the global steel production would considerably surpass the figure of 2007. By the
middle of the year, key figures worldwide showed the monthly average of steel
production, which guaranteed annual indicator at the level exceeding 1,400 mmt.
Yet, already in June, after the peak was accomplished, steel market noted
negative trends. For the first time after several months of excessive demand for
steel products, producers faced problems in steel products sales at the spot market
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as well as in composing portfolio of orders. Nonetheless, general market condition

back then was not yet particularly threatening further development.
Deterioration of demand and negative price tendencies during summer
months used to be typical in the previous years.
However, negative trends developed like some waves within the system of
interrelated regional markets. In this way, demand traditionally started reducing
because of rain season in Southeastern Asia. As a rule, it pressed more on the
supply at neighbor markets and gradually rolled on to reach large regional markets,
such as the EU and USA, where it concurred with the vacations season.
Under this scenario, markets began reviving also in Asia, where buyers were
back to purchase activity somewhere in the end of July – early August. With this
demand on the rise, supply volumes at other markets started falling, which resulted
in considerable recovery in buying activities. Thus, many market participants had
been expecting traditional August recovery of demand and subsequent autumn
season of higher purchases.
This expectation turned out one of the key factors that aggravated
consequences of the global financial crisis for the industry. Demand recovered
neither in August, nor even in the beginning of September. Seasonality attributed
to June disclosed only a part of the existing problem. Meanwhile, obvious
bottlenecks in consuming sectors’ performance at major world markets were left in
the shadow of the successful first half-year. Looking forward to the soonest revival
of demand, steel makers were not in a hurry to cut on production volumes.
Throughout June (first month of the observable reduction in demand), world
output of steel lost mere 0.6% versus the high peak seen in May. The following
months demonstrated reduction by only 2.1-4.2% (July-September). And only as
late as in October, when the depth of the existing problem became obvious,
production went down by all 8%. Moreover, November results showed production
decline rates even exceeding 10%.
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On the whole, global steel production over the 6 months of 2008 plummeted
by more than a quarter. It took only half-year to the world metallurgy to return to
average monthly volumes of production seen in 2004.

Hitting the exports

In November, more than 65% of steel production decline, which was
estimated in comparison with the highest annual figures, was attributed to only 5
countries: China (around 35% in global decline), USA (12%), Russia (8%),
Ukraine (7%), and Japan (6%). Impact of the global economic crisis on ferrous
metals markets was the most dramatic in countries, which used to be active
exporters.
In 2007, China, Japan, and Ukraine topped the list of countries net-exporters
of steel. Aggregate share of these three was over 40% in the supplies of semis and
billets, rolled material, long products, as well as tubes to the world export market.
These particular exporters were the first to be hit by the world financial
crisis – in September, China, Ukraine, and Japan jointly accounted for some 70%
in global reduction of steel output. Later in November, when the crisis
consequences were already observed in every region, these three countries were
accountable for 50% of the world steel production decline.
Meanwhile, the extent to which the reduction influences steel makers in
different countries varies. Though companies in China lead the way in the volumes
of cut production, the trend only covered just a bit over 20% of the national steel
output. The respective figure for Japan is 16%, whereas the Ukrainian steel
industry – facing a reduction of steel output by almost 60% – is standing on the
edge of survival.
Crisis events have once again uncovered for Ukrainian metallurgy the fact
that domestic metal consumption volumes are of key importance for rather stable
performance of the industry. The situation, when around 80% of the produced steel
is shipped for exports, bears a high degree of risk.
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Thanks to smaller supplies to foreign markets and greater capacities of

domestic consumption of metal, other exporting countries managed to smooth the
fall and maintain production volumes in the hard times. Hence, Russia though
being the fourth largest net exporter country started notably reducing steel output
only in October-November. And production volumes in these months were 60-70%
of May volumes. Despite aggressive sales policy of competitors and falling
demand at traditional markets of North and South America, Brazilian steel makers
even succeeded to keep the load rate at 80-90% at this period.
Countries, which have sufficient volumes of domestic metal consumption,
get another trump crucial for current market environment – the opportunity to limit
exports in order to support local producers.
Protectionism, which used to be so traditional for the global metal market,
almost faded away in the last couple of years due to growing demand – many
countries lifted their non-tariff restrictions and supported domestic metal
consumers by lowering import tariff rates.
Today these approaches are changing. Having once reduced, the number of
investigations and positive decisions on unfair competition at steel markets of the
European Union and the United States started growing again – only in the last few
months a whole range of protective measures were introduced, and new claims of
domestic producers were admitted to examination.
Steel makers’ requests to increase import tariffs are more and more often
voiced in many countries and already get attention and understanding from the
governments of these countries. Thus, India, which back in spring reduced many
positions of steel products import tariffs to a naught, raised the duty to 5% in the
middle of November.
On the other hand, China, which systematically limited steel exports from
the country, soothed many restrictions amid a threat of heavy reduction of
economic development rates. Since early December the country abolished export
duties for almost all flat articles as well as some long products. Meanwhile,
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restrictions on export of raw stock, semis, and most of long products are still
effective. However, prospective regulation of their exports is only subject to
economic policy of Chinese government and current economic wisdom. In this
way, the major operator of the world export market keeps its sizable reserves to
boost competitiveness of China-made articles.
That is to say, one can observe considerable changes in the paradigm of
global steel market operation. Today it can go back to the previous model with
powerful impact of protectionism policy, which makes availability and volumes of
domestic metal consumption one of the most critical factors for the industry
survival.

Consumption crisis
Current negative events on the steel market are not based on short-term
excess of supply over demand, as it used to be in the previous years, but on the
global economic decline, which involves all regions and all consuming industries.
Analysis of data over the last 40 years demonstrates the scale of
consequences, which global economic recession bears to key metal consuming
segments of economy. Previously, a 1% reduction in global GDP growth rate
fostered contraction of the world metal market by 2-10% and had extremely
negative impact on its development within the subsequent 3-5 years.
Present-day crisis is occurring amid very low indicators of world economic
development and rather blurry prospects for the upcoming years. In the last several
months experts of the International Monetary Fund (IMF) revised their vision of
future economic growth several times. In the most recent version of the forecast
published on November 6, 2008, the IMF has already lowered expectations of the
world GDP growth in 2009 to 2.2% (previous forecasts were at the levels of 3.8%
and 3%). Meanwhile, if earlier the Fund forecasted a 4.2-4.8% increase of growth
rates in the upcoming years, today the expectations for 2010-2013 are not even
published.
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Developed economies make the biggest “contributions” to the recession

trend: in the next year GDP of countries from the “advanced economies” group
may shrink by 0.3%. In 2009, economies of the USA, European Union, and Japan
are expected to lose correspondingly 0.7%, 0.5%, and 0.2% of their volume.
Today the news on serious production cutbacks and contraction of order
portfolios arrive almost from every metal consuming segment.
The financial crisis has been negatively affecting the U.S. construction
sector for more than a year already. Problems of infrastructural projects financing
reduce their implementation volumes worldwide.
Machine building industry is in no better situation. Car market of the USA
dropped by 18% in 2008, Japan – by 5.6%. According to ACEA data, the amount
of new cars registration in Europe lost 11% over January-November. Portfolio of
yellow goods producers directly depends on the construction activity as well as
operational dynamics in mining segments, and by now has considerably reduced.
Shipbuilding in Asia, which recently became the center of this industry, has been
negatively influenced by lower demand for transportation vessels amid falling
cargo shipments. The latter is crucially negative for railway wagon building. The
situation is similar in other industries.
Hence, global economic crisis has already seriously hit the condition of
metal consuming sectors. Through systematic influence at each stage of the value
creation chain in steel making, it caused rapid and aggravating setback in demand
in just a few months. As evidenced by the previous experience, the recovery will
take much more time.

Prospects
Crisis may have long-lasting influence on market operation. The key issue
today is whether countermeasures are available and effective.
Intensive development of the events and unpreparedness for effective
counteraction has already shown the result for 2008 – global production of steel
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went down for the first time since 2001. For now, the decline is rather minor at 2.2-
2.5% – down to 1,310-1,315 mmt. But, as it has already been mentioned, it is the
outcome of negative determinants acting over just a short period of time...
The largest decline at the world steel market should be expected in 2009,
when current consumption trends will reveal to their most, effect of the crisis will
reach its high, and then gradual recovery of the global economy will begin.
Analyzing development dynamics of ferrous metals market, global GDP, as well as
key consuming industries over 1970-2008, the following volumes of the world
steel output reduction may be expected in 2009: under optimistic scenario of
development – down to 1,300 mmt (-1% as compared to the level of 2008),
conservative – to 1,250 mmt (-5%), and pessimistic – to 1,200 mmt (-8%).

CONCLUSION

Despite rather gloomy prospects of further market development, which

evolved upon analysis of the past years’ data, one should not underestimate the
chances that crisis conditions can be less deep and lasting than before.
First, so far the recession is observed at the advanced markets, economic
development of which is more related to services than material production. Metal
consumption of GDP in countries like Brazil, Russia, India, and China (BRIC)
heavily exceeds the level of the EU, USA, and Japan. Even though the figure is
gradually declining in BRIC states too, it is still times higher than the indicator in
the advanced economies. Based on the IMF data, in spite of significant slowdown,
some economic growth in the developing economic is expected to continue.
Therefore, China’s economy may add 8.5% in 2009, India – 6.3%, Russia – 3.5%,
and Brazil – 3%.
Second, metal consumption can be maintained by purposeful
implementation of large infrastructure projects, which are fulfilled with the state
support, as well as niche markets that still preserve liquidity (E.G. Middle East).
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Third, due to current decline in demand and prices, fulfillment of many long-
term investment projects for steel making capacities development becomes
inexpedient, which leads to many of them being revised and cancelled. Moreover,
it demands operating enterprises to raise their efficiency of market performance. In
the medium run, it will make market development more balanced and steady.
Hence, the future development of the world metal market will largely
depend on the efficiency and complexity of measures taken now by governments
to maintain the economy, as well as on the growing efficiency of the companies’
operational performance.
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Published:
Siryk, A 2008, “Time for solutions: world steel market in times of global economic
crisis”, Metal Monthly Magazine, No. 11-12 (107-108) 2008, pp. 18-21

Translated to English:
Olga Romanyuk, Research & Consulting Group AG