North of the Border: The Future of Canadian Steelmaking

Transcription

1 North of the Border: The Future of Canadian Steelmaking Presentation at: 75 th Annual Convention Ottawa, Canada by: Becky E. Hites, President June 10, 2016

2 Canada Accounts for 11% of North American Crude Steel Production North American Crude Steel Production by Country Canada 11% United States 72% Mexico 17% Source: World Steel Association 2

3 Crude Steel Production Was Down 8.6% in 2015 and Down in All Three Major North American Countries North American Crude Steel Production USA Canada Mexico Million Net Tons Source: World Steel Association 3

4 Canadian Crude Steel Production Has Stagnated Over the Past 5, 10 and 20 Years North American Crude Steel Production Compound Annual Growth Rates Years 20 Years 10 Years 5 Years 1 Year Canada 0.7% -0.7% -2.1% -0.9% -2.2% Mexico 3.8% 2.1% 1.2% 1.6% -3.9% United States -0.8% -0.9% -1.8% -0.4% -10.5% Total - North America -0.3% -0.5% -1.4% -0.1% -8.6% Source: World Steel Association 4

5 And Was 12.5 Million Metric Tonnes in 2015 Million Tonnes Canada Crude Steel Production Source: World Steel Association

6 Canadian Steelmaking Has Been in Decline Through Both the BOF and EAF Production Routes 12 Canadian BOF and EAF Annualized Monthly Crude Steel Production 10 Million Net Tons 8 6 BOF EAF Source: AISI, Statistics Canada & Canadian Steel Producers Association 6

7 Compared To the 2000 Peak, in 2014 BOF Steelmaking Was Down 2.1 Million Tons and EAF Was Down 1.8 Million Tons Canadian Crude Steel Production by Type BF/BOF EAF Million Net Tons Source: AISI, Statistics Canada & Canadian Steel Producers Association 7

8 Electric Arc Furnace Steelmaking Has Been Steady At About 40% of Canadian Production 50% 45% 40% 35% Canadian EAF Percent of Total Crude Steel Production Percent of Total 30% 25% 20% 15% 10% 5% 0% Source: AISI, Statistics Canada & Canadian Steel Producers Association 8

9 Canada Has 14.5 Million Tons of Crude Steel Capacity and 15.6 Million Tons of Finished Product Capacity Split 12.6 Million Tons of Flat Products and 3 Million Tons of Long Products Major Canadian Mills Capacity Year Age of Semi Product Mill Started Mill BOF/EAF Long/Flat (Thousand Tons) Products Alta Steel, Edmonton, Alberta EAF Long Rebar, Flat Bar, Engineered Bar, Ball Stock, Moly-Cop Grinding Rod ArcelorMittal Dofasco, Hamilton, Ontario BOF/EAF Flat 3,630 4,600 HRB, CRC, Galv, Galvanneal, Galvalume, Tinplate, TagTough, UltraVit ArcelorMittal Montreal-Contrecoeur, Quebec EAF Long Bar & Wire Rod ArcelorMittal Montreal-Longueuil, Quebec EAF Long Bar Essar Steel Algoma, Sault Ste Marie, Ontario BOF Flat 4,084 3,300 HRB, CRC, Plate Evraz, Regina, Saskatchewan EAF Flat 1,200 1,200 Slab, HRB, Pipe & Tube Gerdau Cambridge, Ontario EAF Long Rounds, Squares, Flats, Angles, Channels, Sections & Rebar Gerdau Manitoba, Selkirk EAF Long Merchants, SBQ, Rebar, Angles, Channels & Light Beams Gerdau Whitby, Ontario EAF Long 1, Angles, Channels, Grader Blades, Rebar, Beams, Flats & Billets Hamilton Specialty Steel, Ontario EAF Long SBQ US Steel Hamilton, Ontario BOF Flat Idle HRB, CRC, Galv US Steel Lake Erie, Nanticoke, Ontario BOF Flat 2,600 3,600 HRB, CRC, Galv, Galvanneal Total 14,544 15,645 Source: AIST Directory Iron & Steel Plants, Company Reports, Market Sources, & Steel-Insights, LLC estimates 9

10 Apparent Steel Consumption in Canada Has Declined At a 1.5% Compound Annual Rate Over the Past Decade Through 2015 Canada Steel Production, Imports and Exports 30 Production Imports Apparent Steel Use 25 Million Tonnes e Source: World Steel Association 10

11 Canadian Shipments in 2014 Were 76% Sheet, 11% Bar, 3% Plate, 3% Wire Rod, 2% Primary Forms, 2% Tin Plate Canadian Steel Shipments by Product Million Tons Including Primary Form Products Sheet 76% Bar Products 11% Plate 3% Wire Rod 3% Structurals 2% Primary Forms 2% Tin Plate 2% S Rail & Structurals 1% Source: AISI & Statistics Canada 11

12 Canada Exports Over Half of Its Steel Production Canada Steel Production and Exports Production Exports 12 Million Tonnes Source: World Steel Association 12

13 Exports Were 7.1 Million Tons in 2014, Up From 6.5 Million Tons in 2013; With 1.6 Million Tons of Sheet & Strip, 1.2 Million Tons of Pipe & Tubing and 1.1 Million Tons of Galvanized Sheet Canadian Steel Exports Sheets & Strip Pipe & Tubing Galvanized Hot Rolled Bar Plate Semi-Finished Wire Rod Tinplate & TFS Rails & Accessories Million Net Tons Source: AISI & Statistics Canada 13

14 Imports Surged 15% in 2014 Led By 2.2 Million Tons of Pipe & Tubing & 1.5 Million Tons of Coated Sheet Canadian Steel Imports Pipe & Tubing Coated Plate, Cut-To-Length Hot-Rolled Structural Shapes Cold Rolled Hot Rolled Bar Reinforcing Bar Semi-Finished Million Net Tons Source: AISI, Statistics Canada & Global Trade Atlas 14

15 Our New Challenging World Less homogeneous economic growth. Commodity oversupply for the next half decade will impact pricing. China s attempt to shift back to a consumer based economy has stalled growth in many trade partner countries. Currency instability has disrupted global trade. Managing through tumultuous times requires tenacity. 15

16 Steel Market Highlights Steel is oversupplied both globally and in the North American market (perhaps not currently with over 10.4 million tons of blast furnace capacity idle at the moment). Pricing globally has been driven by falling raw material costs and cheap foreign offerings. Demand is ok but not superb. Commodity cycle will likely have a protracted price bottom, which will keep downward pressure on steel prices for longer than usual for an extended bathtub shape recovery. 16

17 17 Global GDP More Than Doubled From 2003 to 2015; Up 4% On a CAGR Basis Over The Past Half Decade; World Bank Estimates Growth At 2.4% for $ in Trillions e Global GDP Source: The World Bank

18 Global GDP Has Only Been Down 5 Years in the Past 55 Years 10% of the Cycle Global GDP Growth 25% 20% 15% 10% 5% 0% e Percent Change -5% -10% Source: The World Bank 18

19 North America and Europe Account for Almost Half of the Global Economy Global GDP by Region, 2014 European Union 24% East Asia & Pacific (all income levels) less China 14% North America 25% China 13% Source: The World Bank Other MENA 2% 5% South Asia 3% Latin America & Caribbean (all income levels) 8% Europe & Central Asia (all income levels) 6% 19

20 Top 10 Economies Account for 65% of Total Global GDP Includes 3 Developing Countries Top 10 Economies Percent of Global GDP, % of Total Global GDP United States 22% China 13% Japan 6% Germany 5% United Kingdom 4% Source: The World Bank Other 35% France 4% Brazil 3% Italy 3% India 3% Russian Federation 2% 20

21 Global GDP in Sync in 2003/2004 and e 2016e World North America European Union East Asia & Pacific (all income levels) less China China Latin America & Caribbean (all income levels) Europe & Central Asia (all income levels) MENA South Asia Other Arab World Growth Rates World 12.3% 12.7% 8.3% 8.3% 12.7% 9.6% -5.2% 9.7% 10.8% 2.1% 2.8% 2.1% 2.4% 2.4% North America 5.7% 7.2% 7.3% 6.4% 5.1% 2.0% -2.9% 5.0% 4.4% 4.0% 3.4% 3.2% European Union 21.9% 15.5% 4.6% 6.7% 15.6% 7.6% -10.6% -0.4% 8.1% -5.9% 4.3% 2.9% East Asia & Pacific (all income levels) less China 9.3% 10.8% 3.8% 2.1% 6.3% 9.5% -1.0% 15.2% 11.1% 3.4% -6.8% -2.3% China 12.9% 17.7% 16.8% 20.3% 29.1% 29.4% 11.0% 19.4% 24.1% 12.9% 12.2% 9.1% 6.9% 6.5% Latin America & Caribbean (all income levels) 3.0% 16.2% 21.1% 17.4% 18.1% 16.2% -6.0% 23.8% 13.3% 0.5% 2.4% -1.4% Europe & Central Asia (all income levels) 22.2% 25.0% 20.2% 18.0% 24.1% 21.3% -18.7% 17.5% 18.8% 3.2% 4.3% -5.9% MENA 12.6% 16.3% 20.5% 17.1% 18.8% 24.9% -10.8% 16.4% 19.9% 7.8% 0.7% -1.8% South Asia 16.7% 16.0% 14.6% 14.3% 26.7% 1.7% 9.9% 22.7% 9.1% 0.8% 2.6% 9.6% Arab World 12.9% 17.3% 23.0% 18.6% 17.2% 26.8% -13.6% 17.0% 18.7% 10.5% 2.7% 0.6% Source: The World Bank GDP by Region ($ in Trillions) 21

22 Two of the Top 10 Economies Brazil and Russia - Were Down in 2015; The USA Was Up 2.4% And Canada Was Up 1.2% e United States China Japan Germany United Kingdom France Brazil Italy India Russian Federation Other Top Percent of Total 70% 69% 67% 66% 65% 64% 66% 65% 64% 64% 64% 65% 65% Canada Mexico Top 10 Economies Growth Rates United States 4.9% 6.6% 6.7% 5.8% 4.5% 1.7% -2.0% 3.8% 3.7% 4.2% 3.7% 3.9% 2.4% China 12.9% 17.7% 16.8% 20.3% 29.1% 29.4% 11.0% 19.4% 24.1% 12.9% 12.2% 9.1% 6.9% Japan 8.1% 8.2% -1.8% -4.7% 0.0% 11.3% 3.8% 9.1% 7.5% 0.8% -17.4% -6.5% 0.6% Germany 20.5% 12.5% 1.5% 4.9% 14.6% 9.1% -8.9% 0.0% 10.0% -5.8% 5.8% 3.3% 1.5% United Kingdom 16.1% 18.2% 5.0% 7.1% 14.7% -5.8% -17.3% 4.3% 7.6% 0.9% 2.4% 9.8% 2.2% France 23.2% 14.9% 3.7% 5.5% 14.5% 9.8% -7.9% -1.7% 8.1% -6.3% 4.8% 0.7% 1.1% Brazil 9.9% 19.8% 33.2% 24.2% 26.0% 21.4% -1.8% 32.7% 18.4% -7.7% -0.9% -1.9% -3.7% Italy 23.9% 14.6% 3.0% 4.9% 13.4% 8.5% -8.6% -2.7% 7.1% -8.9% 2.8% 0.4% 0.7% India 18.0% 16.7% 15.6% 13.8% 30.5% -1.2% 11.5% 25.1% 7.5% -0.2% 1.6% 11.0% 7.2% Russian Federation 24.7% 37.3% 29.3% 29.6% 31.3% 27.8% -26.4% 24.7% 24.9% 5.8% 3.1% -10.5% -3.8% Other 16.1% 16.6% 12.7% 12.0% 16.2% 12.7% -9.3% 13.0% 12.4% 2.0% 3.6% 0.2% Top % 11.0% 6.2% 6.6% 11.0% 8.0% -2.9% 8.0% 9.9% 2.1% 2.4% 3.2% Canada 18.0% 14.7% 14.3% 12.6% 11.2% 5.8% -11.1% 17.7% 10.8% 2.5% 0.3% -2.8% 1.2% Mexico -3.8% 8.0% 12.5% 11.4% 8.1% 5.6% -18.9% 17.5% 11.4% 1.3% 6.3% 2.9% 2.4% Source: The World Bank Top 10 GDP Economies ($ in Trillions) 22

23 Global Economic Growth of 2%-2.5% Feels Lousy When You re Used to 3%+ Most economies had recovered by 2010 and the world was in positive sync again in In 2012, half of the top 10 economies contracted and the economies have been out of sync since. Global GDP growth for the past 3 years ranged from %. The world is still vulnerable to a slowdown which would approach a flat performance. Banking system has been shored up since the 2008 meltdown, but is still not resilient. There are concerns over opening the European banks. 23

24 Not Only Are the Global Economies Out of Phase ; the Long Cycle of Growth Has Likely Peaked As early as the 1920s-1930s, theories emerged about a long cycle in the global economies. The Kondratieff Wave (or K-Wave) postulated that economies modulate between high and low growth over a year cycle as measured by prices and the inflation rates. Over the years, theories about the length of the cycle have proliferated, generally ranging from years, and have been tied to some new evolutionary change that refueled the growth engine. 24

25 Commodities Have a Non-Linear Supply Curve Classic economic theory quite accurately predicts that as prices rise with increased demand, supply will be developed to meet that demand. Regarding many, if not all, of the raw materials supplying the steel industry and basic industry in general, additional new supply is not linear, but rather choppy in that it takes a period of years to identify the new resource to be developed, obtain the required environmental licenses, establish funding and then develop the mine. 25

26 Demand Goes Undersupplied, and Prices Rise To a Level Where Marginal Projects Get Financed Thus, the demand goes undersupplied for an extended period until supply catches up. And often then supply exceeds demand, pushing the cycle into the over-supply phase. Where marginal projects that should not have been completed, but were caught up in the exuberance of the shortage, now get terminated. 26

27 Canada s GDP Has Posted 55% Growth Over the Past Decade Or a 4.5% CAGR Canadian GDP $ in Trillions Source: The World Bank

28 28 Canadian GDP Grew 0.3% in 2013, Was Down 2.8% in 2014 & Grew 1.2% in 2015 Canadian GDP Growth 25% 20% 15% 10% 5% 0% -5% -10% -15% Percent Change Source: The World Bank

29 Many Macro Economic Events Have Created Constant Disruption The USA Federal Reserve Bank raised rates December 2015 despite multiple global objections and is talking about 2 increases in Greece s debt issues have been seemingly resolved in the near term, but the region isn t stable. The risk from the West s perspective is that if Russia or China or Iran step up to provide a financial bridge, that would be a significant shift in the power balance of the region. EU remains in turmoil with Brexit replacing Grexit as the latest crisis (June 23 decision), provoked in part by the migrant crisis EXIM Bank in the USA was defunded mid-2015, but was refunded with the new Highway Bill in December More than one voice is prophesying a global economic recession. For sure, no one is predicting a strong global economy. Oil. The Saudi s dropped the price to stem funding of new projects. The USA is now energy self sufficient, and there s a tug-of-war for market share between OPEC, Russia, and now Iran. 29

30 30 Global Dislocation & Other Scandals Are Also Disrupting Economies Russia Ukrainian border Has seriously impacted steel production from Ukraine, which was low cost production, and has somewhat impacted raw material costs into Russia. Russia has rattled its saber about restricting scrap outflows due to shortages in the country. The Migrant Crisis has disrupted Europe on multiple levels: humanitarian, diplomatic, financial, security, religion, business ISIS Disrupting Turkey, Russia, Paris, London, Brussels and the USA, Mexico and Canada. VW diesel emissions scandal could further derail Germany s economic performance. Feb 2016 Germany Q4 growth 0.3%. FIFA corruption could impact the next two World Cups. Soccer is big business globally. Zika virus threatening participation & attendance at the Olympics in Rio.

31 Higher Cost Energy Could be Lower Cost, But Opting for a Cleaner Environment Oil has now been in global oversupply for 7 quarters starting Q the longest period in my adult lifetime. Bloomberg, June 16, 2015 Pope Francis has entered the clean environment fray with an encyclical calling for more action to halt climate change. Renewable energy generation could overtake coal in 15 year. Financial Times, June 14, 2015 Between now and 2040, expecting $3.7 trillion in solar energy capital investments. Bloomberg Business, June 23,

32 32 Global Crude Steelmaking Has Moved Into a Period of Consolidation After 15 Years of Unusually Strong Growth Driven by Development in China Global Crude Steel Production 1,800 1,600 1,400 1,200 1, Period of Consolidation Million Tonnes e Source: World Steel Association

33 The Steel Industry is Highly Cyclical and Closely Correlated to the Commodity Cycle The Current Correction is Moderate Compared to Past Cycles BUT BIG CHANGES IN STRUCTURE 60% Global Crude Steel Production Year-Over-Year Change 50% 40% Percentage Change 30% 20% 10% 0% -10% -20% -30% -40% Source: World Steel Association 33

34 China Added 900 Million Tonnes of Crude Steelmaking Capacity Over the Past 15 Years And Now Accounts for 50% of Global Capacity 34

35 Colonial Model of Supply No Longer Holds True as Two-Thirds of Global Crude Steel Production is in the Developing World Countries 35

36 36 The OECD Estimates the Global Crude Steelmaking Overcapacity at 600 Million Tonnes, or 30% of Demand. The Big Question is Which Countries Will Reduce Assets?

37 China Is Capitalistic, Except When It Isn t; The Country Will Enact Policies to Eliminate Steelmaking Overcapacity 13th 5-Year Plan ( ) makes it a priority to improve the environment and have the RMB included as a reserve currency. The Steel Industry and improving the environment are conflicting priorities. Your turn to give back. Steel production capacity will be cut by 100 million to 150 million tons, China s State Council announced Sunday without specifying a time frame. That will translate into as many as 400,000 lost jobs, said Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, according to a report by the official Xinhua News Agency Monday. China will raise funds to help dismissed workers, Xinhua said. China s leaders have vowed to reduce excess industrial capacity and labor in state enterprises even as they battle the slowest growth in a quarter of a century. They are grappling with a delicate balancing act as they strive to restructure the economy away from investment-led growth without tipping it into a deeper slump. Bloomberg Business, January 25,

38 But So Far, Net Reductions in Chinese Steelmaking Capacity Are Non-Existent Due To Other Country Objectives Maybe million tonnes of steelmaking capacity was shut down, BUT they re still building new replacement sheet mills, the bar mills are mostly independent companies and there were reports that when the prices increased in early May, most of that capacity came back on-line. The program to cut 500 million tons of coal mining has reportedly been more effective with 1.3 million jobs eliminated. Some in the West are now speculating there will be a coal shortage in China in the fall. Policy enforcement get more aggressive in the second half and last year of the 5-Year Plan. Before the Olympics in 2008, they shut the power plants down to improve air quality. It s a Command Economy. China wants most favored nation trading status with the WTO which is being aggressively fought by steelmakers and politicians in the West. Until the IMF deal adding the RMB to the trading currency basket is done in late 2016, China needs to keep its trade figure high, and will likely continue to permit substantial levels of steel exports. 38

39 World Crude Production Reported Down 3.2% for 2015 at 1.62 Billion Tonnes; S-I Estimates 2016 Production Down 0.8% (WSA SRO Forecast in May Matched S-I Outlook) Crude Steel Production by Region (Million Metric Tonnes) e China % -2.3% -0.6% Japan % -5.0% -3.5% India % 2.6% 3.5% South Korea % -1.9% -1.8% Other Asia % -12.9% -4.6% EU % -1.8% -0.5% Russia % -0.5% -1.0% Ukraine % -15.6% -5.0% Other CIS % -0.2% 0.3% Turkey % -7.4% 2.5% Other Europe % -5.1% -1.0% NAFTA % -8.6% 0.5% USA % -10.5% 2.2% South America % -2.9% -2.5% Middle East % -3.2% -1.9% Africa % -2.7% -4.8% Oceania % 4.6% 2.0% Total Global ,148 1,433 1,538 1,560 1,650 1,669 1,617 1, % -3.2% -0.8% Developed World % -4.9% -1.0% Developing World ,020 1,114 1,131 1,105 1, % -2.3% -0.6% Developed % of Total 68% 64% 49% 37% 36% 35% 32% 32% 32% 32% Developing % of Total 32% 36% 51% 63% 64% 65% 68% 68% 68% 68% Source: World Steel Association, China Iron and Steel Association & Steel-Insights, LLC estimates 39

40 What s Needed for the Cyclical Rebound Stronger Global Economies Adjustment to the New Normal Global Crude Steel Consolidation Natural Evolution Darwin s Survival of the Fittest. Bottoming of the Commodity Price Cycle Prices Are Likely to Stay Low for an Extended Period Embracing & Navigating Disruption Continued Development of New Steels Reduction of the Cash Cost to Produce 40

41 The World Changes; The Only Way to Win Is To Anticipate and Adapt Critical Resources of the Past Can Become Irrelevant to the Future Ingot Casting Continuous Casting Bessemer Furnace Blast Furnace & EAF 41

42 Canada Is The Fifth Largest Scrap Exporter At About 4 Million Tonnes Per Year Global Scrap Exports by Region/Country (Million Metric Tonnes) % Chg EU-28 10,083 10,566 12,799 15,779 19,033 18,813 19,579 16,806 16, % USA 13,978 16,642 21,712 22,439 20,556 24,373 21,397 18,495 15, % Japan 7,654 6,449 5,344 9,398 6,472 5,442 8,586 8,129 7, % Russia 9,797 7,855 5,128 1,202 2,390 4,042 4,349 3,714 5, % Canada 4,000 4,100 4,084 4,792 5,154 4,832 4,248 4,510 4, % Australia 1,335 1,501 1,708 1,925 1,636 1,745 2,245 2,200 2, % South Africa ,271 1,144 1,224 1,436 1,632 1,732 1, % Total 47,402 47,865 52,046 56,679 56,465 60,683 62,036 55,586 53, % EU % of Total 21% 22% 25% 28% 34% 31% 32% 30% 31% USA % of Total 29% 35% 42% 40% 36% 40% 34% 33% 29% Source: World Steel Recycling in Figures, BIR 42

43 Canada Scrap Imports Have Ranged From 1.5 To 2.3 Million Tonnes Per Year Global Scrap Imports by Region/Country (Million Metric Tonnes) USA % Chg % Turkey 15,100 19,192 21,460 22,415 19,725 19, % 19% Korea 5,621 8,091 8,628 10,126 9,260 8, % 20% India 3,359 4,643 6,175 8,180 5,636 5, % 9% Taiwan 4,459 5,364 5,328 4,955 4,453 4, % 56% USA 4,814 3,775 4,003 3,711 3,882 4, % EU-28 7,294 3,646 3,714 3,203 3,191 3, % 0% China 5,386 5,848 6,767 4,974 4,465 2, % 17% Indonesia 1,063 1,642 2,157 1,944 2,399 2, % 16% Canada 1,476 2,226 1,911 2,343 1,746 1, % 43% Thailand 1,373 1,282 1,877 1, , % 34% Source: World Steel Recycling in Figures, BIR and Steel-Insights, LLC Analysis 43

44 Steel-Insights, LLC Seeing What Others Don t In WWII, American submarine commanders endured despite being outclassed by superior equipment and outgunned (fully functioning torpedoes weren t available to them for the first 21 months of the Pacific War). In the fog of war, as often is the case in business, decisions with long impacting outcomes have to be made without the luxury of complete or definitive information. Steel-Insights was formed to assist executive management teams navigate the noise of battle by more effectively managing the abundant resources available today and harnessing those resources to explore thought provoking and penetrating issues in order to magnify the pivotal decisions required for the long-term success of their companies in arguably tough industries that must survive challenging cycles, i.e. training and empowering submarine commanders. 44

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