The Outlook for Stainless Steel Flat Products A Presentation for the BSSA Distribution Forum June 2004

Transcription

1 The Outlook for Stainless Steel Flat Products A Presentation for the BSSA Distribution Forum Vanessa Davidson Research Manager Special Steels & Alloys CRU International Ltd 31 Mount Pleasant London WC1X 0AD Direct Tel: +44 (0) vanessa.davidson@crugroup.com

2 Demand

3 Attention has recently been focussed on the explosion in Chinese demand Chinese consumption of stainless steel, 000 tonnes 4000 CAGR: 29.0% CAGR: 17.1% 1000 CAGR: 23.1%

4 But other regions are still important consumers of stainless steel, esp. Europe China 10.6% CR Flats HR Flats North America 12.8% Japan 19.2% China 26.5% W. Europe 30.6% ROW 10.5% Other Asia 16.3% North America 11.6% Japan 9.9% Other Asia 18.3% Breakdown of stainless flats consumption by region W. Europe 25.7% ROW 8.0%

5 Europe has entered a lower growth phase for stainless steel consumption European consumption of stainless steel cold rolled flat products, annual average growth, % 10 IP Intensity of Use %pa 4.8%pa 6.5%pa Big Slowdown 2 1.0%pa 1.7%pa

6 Italian demand stagnates as some enduse markets approach maturity Consumption of stainless steel cold rolled flat products in Italy, 000 tonnes 800 No growth in Italian consumption since

7 UK market has been shrinking for five years UK consumption of stainless steel hot and cold rolled flat products, 000 tonnes CR Consumption HR Consumption UK Consumption down 25% from 1998 peak Data: CRU

8 UK market depends on capital intensive sectors which have performed poorly UK Industrial Production Index, 2002= Mechanical Engineering IP (proxy for Process Industries) Sharp downturn between

9 Cyclical or structural decline in stainless consumption in Western Europe? Answer: Mainly structural decline but lack of growth of stainless consumption between exacerbated by economic slowdown Reasons for decline in rate of growth of western European consumption between : Shift of manufacturing facilities to cheaper locations in Eastern Europe and Asia (Structural) Maturity of some key segments consumer goods (Structural) Sluggish economic activity between (Cyclical) Some substitution due to high nickel and stainless steel prices (Cyclical)

10 World growth in consumption of stainless steel depends on CHINA Contribution to global growth in cold rolled stainless steel flat product demand, % RoW China 97% 3% 95% 5% 98% 2% 80% 20% 66% 34% 28% 72%

11 Issues for global demand for stainless steel in the short term : Will substitution be a big factor? To what extent will 200 series take-off in China? How will the Chinese government efforts to cool the economy affect the stainless industry?

12 Stainless steel consumption is relatively inelastic Real nickel price lagged one year vs. change in CR stainless steel consumption, Trend line (linear) 40% yr/yr % chg in consumption 30% 20% 10% 0% -10% -20% -30% -40% Real nickel price, 2003 US$/lb Note: (1) 1970 excluded as outlier (consumption grew by 1.9% despite 1969 nickel price having been $15.74/lb)

13 But demand for austenitic grades could be restricted by a physical shortage of nickel World production of austenitic stainless steel, melted basis, 000 tonnes World production of austenitic stainless steel, 000 tonnes Period of high prices

14 200 series unlikely to become the dominant grade of stainless steel in China In 2002, 200 series represented 3% of Chinese CR flat product consumption. But, by 2003, this percentage had increased to 15% High nickel prices have undoubtedly contributed to the speed with which 200 series has gained market share in China The price-sensitivity of the Chinese consumer is likely to see 200 series continue to gain share of the Chinese cold rolled market this year and next But, in the long run, 200 series is unlikely to become the dominant grade. The enduse markets that are consuming stainless steel in China are better suited to more traditional austenitic grades As the next slide illustrates, this contrasts strongly with India, where 200 series has gained a substantial foothold.

15 Structure of end-use demand in China is different from that in India Chinese consumption of stainless steel by end-use Process Ind. 23.0% Tubes 25.0% Indian consumption of stainless steel by end-use Catering 74.0% Construction 10.0% Other 5.0% Catering 37.0% Tubes 4.0% Process Ind. 11.0% Transport 2.0% Construction 2.0% Other 7.0% Large catering sector in India enables greater use of 200 series than in other markets.

16 Will Chinese Govt. s efforts to cool the economy affect the stainless industry? Two issues to consider: Demand for stainless steel has been adversely affected by a slowdown in bank lending recently. The construction sector has been the worst hit, experiencing a marked decline in demand for stainless steel Investment in stainless steel making capacity amongst the larger companies (Baosteel, Taiyuan etc) will be unaffected by the government s attempts to slow the economy

17 Supply

18 China small scale & industrial producers dominate CR expansions Major changes in stainless cold rolling capacity, 000 tonnes, Nippon Steel SMI Outo. (Panteg) China (St. Owned Thainox Outo. (Sheffield) TKS - Nirosta Nanjing ZPSS India SS Columbus NAS QPSS Outo. (Fi) Yieh United TKS-SKS Posco (Kr) Ningbo Taiyuan China SS 4.2m tonnes of CR capacity due to start-up between m tonnes of old CR capacity to close between Net addition to world CR capacity between is 4.0m tonnes

19 Chinese industrial producers lead meltshop expansions Major changes in stainless meltshop capacity, 000 tonnes, L'Ardoise Isbergues China (St. Own) NAS Columbus Acesita India SS Yieh United TKS-SKS China SS Outo. (Fi) ZPSS Carinox Taiyuan Shanghai No m tonnes of meltshop capacity due to start-up between m tonnes of old meltshop capacity to close between Net addition to world meltshop capacity between is 5.2m tonnes

20 Imports represent a growing proportion of the western European CR market Market share for cold rolled flat products in western Europe, % % 34% 10% 29% Imports TKS % 20% Outokumpu Arcelor 40.0 Acerinox % 24% % 16%

21 Exporting regions, including Europe, under threat Net trade in CR stainless steel flat products, 2003 & 2008, 000 tonnes W.Europe: 2003 Net X = 0.5m 2008 Net X = 0.3m China: 2003 Net M = 1.1m 2008 Net M = 0.1m USA: 2003 Net M = 0.1m 2008 Net M = 0.1m Japan: 2003 Net X = 0.6m 2008 Net X = 0.4m S. Korea: 2003 Net X = 0.2m 2008 Net X = 0.2m Taiwan: 2003 Net X = 0.5m 2008 Net X = 0.2m Key: M = Imports (Red) X = Exports (Black)

22 It could be worse, with China becoming a net exporter of CR products Breakdown of demand and supply fundamentals, China, y-o-y growth 43.8% 13.9% 10.5% 9.0% 8.0% Consumption Possible Capacity [Exports?] Small Scale Supply Industrial Supply Imports Data: CRU, ThyssenKrupp Stainless

23 European hot rolled exports will survive better in short term Western European net exports of hot rolled stainless, slab basis, 000 tonnes Exports (LHS) Annual Additions to Exports (RHS)

24 Conclusions for western Europe: No new meltshop or cold rolling capacity required in Europe in next five years Growth in western European cold rolled shipments to slow as:- - Domestic demand slows - Western European imports rise - Western European mills suffer declining exports of cold rolled material to China Western European meltshop production will be supported by continued high volumes of hot rolled exports to China But, exports of hot rolled material will also begin to shrink towards the end of this decade

25 Prices & Conversion Margins

26 European stainless prices rise to 3 rd major peak in last 10 years Average monthly prices for 2mm CR 304 sheet, nominal, Euros/tonne Peak 1 Peak 2 Peak 3? 800 Jan-94 Jan-97 Jan-00 Jan-03

27 But the peak is being driven by raw material prices Western European price of cold rolled stainless steel sheet, Euros/tonne 2500 Base price, Germany, CR304 2mm / 2b sheet, /tonne (LHS) Alloy surcharge (RHS) Q1994 1Q1996 1Q1998 1Q2000 1Q2002 1Q2004

28 And consequently conversion margins remain well below 1995 peak Western European conversion margins CR304 2mm/2b sheet, Germany, US$/tonne 2000 US$1,600/tonne 1500 US$1,100/tonne US$1,100/tonne '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04

29 Western European prices have traditionally been higher than in Asia, but will it last? Comparison of Western European & Asian prices, CR304 2mm/2b sheet,us$/tonne Differential Germany Hong Kong Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

30 Conclusions for Western Europe: Raw material prices are driving the upward trend in stainless steel prices Conversion margins have improved but remain significantly below the peak year in 1995 Europe has traditionally enjoyed higher prices than Asia But, with increasing competition in the home market and shrinking export opportunities, the European price premium may decline and ultimately disappear

31 Conclusions & Implications

32 Conclusions & Implications for Western Europe: The Western European stainless steel market is showing signs of maturity. Future growth in consumption is therefore likely to be considerably lower than was experienced between The ability of western European mills to export CR flat products to China will decrease sharply from now on Best case scenario China is self sufficient in CR flat products by 2008 Worst case scenario China is a major net exporter of CR flat products by 2008 European melt shop capacity utilisation will be supported by HR exports in the short term, but this won t last forever Shift in export product mix to greater % of hot rolled products will adversely affect revenue With rising European imports and reduced exports, European producers could struggle to maintain high cold rolled stainless steel prices in the home market