18 th May Global Steel Industry Trends: Is the perception the reality?

Transcription

1 18 th May 2004 Global Steel Industry Trends: Is the perception the reality?

2 Investors have perceived the steel industry negatively Poor returns over the long term, high volatility, relatively small size and constrained liquidity has moved the steel sector to the fringe of the equity investment universe ABN Amro (early this decade) 2

3 Structural issues have caused poor steel industry returns Low demand growth Fragmented industry High fixed & capital costs Political industry Historical Industry Performance Overcapacity Long term price decline Full utilisation, marginal pricing Price volatility Poor returns Capacity creep Concentrated Suppliers High exit costs Global auto customers 3

4 However, recent dramatic rises in global steel prices may suggest structural improvement CRU Global Steel Price Index (Index April 1994 = 100) Global Flat Products Long Products Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 1997/ / / / / / /04 Source: CRU International 4

5 What is changing? Global economic growth synchronised Global steel demand, especially China Supply/demand gap in China Industry behaviour in OECD/privatisations Input costs Different pattern for capacity additions 5

6 Strong global economic growth outlook Real Global GDP % Growth 5% Forecast 4% 3% 2% 1% 0% Source: Consensus Economics, IISI 6

7 Likely to be synchronised growth in OECD 6 Month Annualised % Change OECD Leading Indicators US Europe Japan Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Source: OECD 7

8 Also, strong growth in large emerging economies GDP % Growth - Emerging Economies 12 Forecast China India Russia Brazil Source: Consensus Economics, IISI 8

9 Australia performing strongly including steel using sectors Australian GDP Growth (%, pa) Inflation, Interest Rates & Unemployment (%, pa) 6% 5% 4% 3% 2% 1% Forecast 20% 16% 12% 8% 4% 90 Day Bank Bills CPI Unemployment Rate Real Interest Rates Forecast 0% '00 '02 '04 '06 0% '00 '02 '04 '06 Construction Value (Constant A$bn) Sectoral Investment (Constant A$bn) 40 Forecast 16 Forecast Residential Engineering 12 8 Manufacturing Mining 10 Non-Residential 4 Agriculture '00 '02 '04 ' '00 '02 '04 '06 Source: BIS Shrapnel, Access Economics 9

10 Global steel demand growing strongly largely driven by China 1,200 1, Global Steel Demand IISI Base Case (million tonnes) China ROW World Forecast , By 2010, China may be 35% of global demand, vs 27% in Source: IISI 10

11 Has the steel industry returned to the demand growth seen before the 1973 oil crash? 1,200 World Steel Consumption by Region (million tonnes crude steel) Forecast 1,000 China Japan Other Asia West Europe East Europe Ex Soviet Oceania, Mid East, Africa Canada USA Source : Macquarie Bank, The Steel, Iron Ore & Coal Outlook, Jan 04 11

12 There is currently a large Supply / Demand gap in China Let China sleep, for when she wakes she will shake the world - Napoleon Total Chinese Steel Imports (million tonnes) Flat Products Long Products Source : Macquarie Bank, The Steel, Iron Ore & Coal Outlook, Jan 04 12

13 China is experiencing massive capacity growth Estimated Chinese Industry Capacity Expansion from 2002 vs 2006 (million tonnes) Ironmaking Steelmaking Hot Strip Mills Cold Rolling Mills Source: HB Advisors/Rothschild, China Should We Be Scared?, Feb 04, World Steel Dynamics 13

14 Consolidation in OECD Production Share of Top 3 Steelmakers in Each Region (%, 1998 vs 2003) US 55% EU 50% Japan 64% 33% 31% 49% USS, ISG, Nucor Arcelor, LNM, Corus JFE, NSC, Sumitomo Source : POSCO, POSCO Growth & Innovation, Jan 04 14

15 Input costs are rising - Scrap US #1 Heavy Melting Scrap (US$/ mt) Source: Datastream 15

16 Input costs are rising Steelmaking raw materials Source : ANZ Bank Resources Market Outlook, Mar 04, Tex Report 16

17 Increased Chinese demand is causing rise in input costs. Currently no excess seaborne iron ore capacity 700 Seaborne Iron Ore Demand Vs Theoretical Capacity (million tonnes) Forecast DEMAND 600 Others 500 Theoretical capacity 400 China Japan EU Source: IISI 17

18 Shipping costs have risen dramatically: Global fleet cannot meet demand exacerbated by port congestion 8,000 Shipping rates (Index) BDI Index BCI Index Capesize Fleet Capacity (Million DWT) ,000 4, ,000 Port Congestion Index Aust Coal Ports 0 16 SSY Coal Port Congestion Index Jan- 95 Mar- 96 May- 97 Jul-98 Oct- 99 Dec- 00 Feb- 02 May BDI Baltic Dry Index, BCI Baltic Cape Index Source: IISI, Baltic Dry Index, SSY 0 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 18

19 Other raw material costs also increasing Source: Datastream 19

20 What is changing? Global economic growth synchronised Global steel demand, especially China Supply/demand gap in China Industry behaviour in OECD/privatisations Input costs Different pattern for capacity additions 20

21 Implications Don t expect a weak Chinese economy any time soon Steel prices are likely to remain high for some time Pressure for structural change in finished products pricing An inflationary phase? 21