When China puts on the brakes, the rest of the world fastens their safety belts – and this is nowhere more true than in the steel industry.
China’s huge consumption of world steel to feed its infrastructure investment this century fuelled a global commodities boom, but this is now shrinking – instead it’s shifting large steel volumes onto the international market.
Chinese steel exports have grown by a third in the first half of the year, and at continually lower prices.
The effect has been to drive down prices elsewhere, including across Europe.
Driving down prices
CRU’s market analysis shows that delivered prices for structural steel, for example, have fallen from £488/tonne to £417/tonne over the past 12 months.
Meanwhile the October UK price for reinforcing bar was £313/tonne, down almost 25 per cent from a year ago. We do not see any prospects for prices to rise again this year.
CRU revised its forecast for global steel prices earlier this month, dropping its quarterly forecast throughout 2016 for its German structural sections benchmark to €515/tonne in quarter one (compared to €602/t in 2104 Q1).
“We do not see any prospects for prices to rise again this year”
This suggests that UK structural steel prices will dip below £400/tonne through next year. In the longer term we do not expect prices to rise above 2014 levels until after 2018 – even then prices will be below inflation growth.
What could change what UK construction is likely to pay for its steel?
UK market affected
The biggest impact for prices over the next few years would be if China took capacity off the market by shutting older, smaller, more polluting or less efficient steel mills – but despite most Chinese mills losing money at current prices, large scale closures in the very near future are unlikely for political reasons.
However, we are seeing steel mills closing or making drastic cuts in the US, Canada, Germany, Brazil, India, and of course the UK.
“The other thing which could raise prices would be an increase in demand, to soak up the steel glut”
There will be more closures, but the cost of idling capacity and the length of time it takes to get mills back up and running again when prices do rise tends to inhibit steelmakers from closures unless they are forced to.
The other thing which could raise prices would be an increase in demand, to soak up the steel glut.
European construction demand is still weak – only Germany and the UK are above 2011 levels.
However, UK construction output is expected to grow by about 3 per cent next year, better than any other major country (in contrast French demand will shrink).
But it will require something more than this for prices to rise faster than the currently forecasted sluggish rate.
Nick Edwards is General Manager of Steel at CRU, the global commodities analysis company, and a former editor of Construction News