Global steel production is projected to increase at an average rate of 4.7% a year to more than 1.57 billion tons (1.6 billion t) in 2012, underpinned by continued strong growth in Asian demand, the Australian Bureau of Agricultural and Resource Economics (ABARE) says in its recent quarterly global outlook review.
The independent government forecasting bureau says despite the higher production, demand is such that iron-ore contract prices for the Japanese financial year that were signed in late December rose 9.5% – the fifth consecutive year of price increases.
“Factors that contributed to the rise in contract prices include rising global iron-ore demand, led in particular by China’s steel industry, combined with limited growth in iron-ore supply capacity in the world’s major producers – Australia and Brazil,” ABARE says in a statement.
“The limited growth in iron-ore supply by the world’s major suppliers, and associated high prices, has encouraged a large increase in iron ore production in China from deposits that typically contain lower-quality ore and are more costly to access,” the bureau continues.
ABARE says the latest increase in contract prices means negotiated benchmark iron-ore fines and pellet prices have nearly tripled since 2003. Negotiated prices rose by 19% for 2006, 71% for 2005, 19% in 2004 and 9% in 2003.
“These rising prices stimulated substantial investment in new iron-ore production and transport capacity, much of which came on stream in the second half of 2006 and is expected to ramp up to full capacity around 2008 or 2009,” the report says.
“With further increases in capacity anticipated for 2007 and beyond, capacity utilization rates are expected to decline and stocks to rise throughout the supply chain. This substantial increase in the availability of iron ore, particularly from low-cost suppliers, is projected to contribute to an easing of prices over the medium term.”
Negotiated iron-ore contract prices are projected to remain stable in 2008 before falling by 5% in 2009 and another 9% the following year. However, even with these drops, iron-ore prices will be relatively high over the outlook period through 2011-2012.
The continuing increase in steel demand can be attributed mostly to China, ABARE says. In the short and medium term, China’s industrialization and rapid urbanization will continue to be the most important drivers of growth in world steel consumption.
“Countries such as India that have rapidly growing steel consumption will become increasingly important to the outlook for world steel,” the bureau adds.
But steel consumption in developed economies such as the U.S., Japan and the European Union is expected to remain flat.
Consumption of steel in China almost has doubled over the past four years, rising from 203.7 million tons (207 million t) in 2002 to an estimated 390 million tons (396 million t) in 2006. This year, steel consumption in China is forecast to increase another 13% to 441 million tons (448 million t) and then grow at a slightly slower rate of 8% a year to reach 638.8 million tons (649 million t) in 2012.
“Underpinning the projected increase in steel consumption is an anticipated continued strong growth in output across a range of steel-intensive manufacturing industries, such as motor vehicles, shipbuilding and household appliances,” ABARE says.
Despite an inadequate infrastructure in India, particularly in transport, the report says India will have economic growth of about 7% a year in the period to 2012 – and this means demand for steel will be strong.
Indian steel consumption is projected to rise by an average of 9% per year to 77.7 million tons (79 million t) by 2012, the report says.
The relocation of U.S. manufacturing firms to countries with lower production costs, such as developing Asian countries and Mexico, is expected to reduce the likelihood of substantial growth in U.S. steel consumption over the outlook period. Similarly, in the six years to 2012, steel consumption in the European Union is projected to grow by only 0.8% a year, while in Japan it is projected to fall by an average of 0.3% a year.
ABARE says significant new steelmaking capacity is expected to be built over the outlook period, leading to strong growth in global steel production – projected to increase on average by 4.6% a year between 2006 and 2012, or by about 374 million tons (380 million t) to the projected total of 1.57 billion tons in 2012.
In the six years to 2012, China’s steel production is forecast to grow more than 246 million tons (250 million t) – about 8% annually – to about 659.4 million tons (670 million t). Most of this increase is expected to be consumed domestically, with China’s net exports of crude steel projected to grow by an average of only 1.2% a year over the outlook period.
“Most importantly, developments in China will continue to have a significant impact on global steel and steel-making raw materials markets,” the report says. “In particular, China is projected to account for around 90% of the growth in global iron ore imports between 2006 and 2012.”
Steel production in India is projected to rise by 8.5% annually over the outlook period, from 42.3 million tons (43 million t) in 2006 to 68.9 million tons (70 million t) in 2012. The Indian government’s national steel policy is to increase steel production to 98 million tons (100 million t) by 2020.
In contrast, U.S. steel producers have been cutting production in an effort to reverse recent declines in steel prices. Data from the American Iron and Steel Institute show that U.S. steel mills were operating at only 76% of capacity in the first week of January, 10% lower than at the same time in 2006.
Over the medium term, increased output from lower-cost steel producers in Asia is expected to erode the competitiveness of the U.S. steel industry. As a result, growth in U.S. steel consumption over the outlook period is expected to be met by increased imports.
Overall, U.S. steel production is projected to total 98 million tons in 2012, just 1.95 million tons (2 million t) more than in 2006.
Last year, Japan remained the world’s largest net exporter of steel, with shipments of some 29.5 million tons (30 million t), most of it destined for Asia. However, over the outlook period, a number of countries – notably China and Thailand – that usually import steel from Japan are expected to invest in new domestic steel-production capacity.
As a result, steel production in Japan is projected to grow by only 0.3% a year to 116 million tons (118 million t) in 2012.
Brazil is forecast to increase its production of crude steel substantially over the outlook period – by 8.9 million tons (9 million t) to reach 39.4 million tons (40 million t) in 2012.
The Iranian government plans to triple steel production capacity to about 29.5 million tons (30 million t) by 2012, but ABARE says that as long as the country is under threat of United Nations sanctions because of its nuclear ambitions, it is unlikely to attract sufficient foreign investment to fully achieve its target.
Consequently, ABARE predicts steel production in Iran will double, rather than triple, over the outlook period to reach 17.7 million tons (18 million t) by 2012.
Correlating with the projected amount of steel production, world production of iron ore is projected to grow by about 5.2% a year to reach 1.97 billion tons (2 billion t) in 2012.
The majority of this increase is expected to come from new iron ore mines and expansions in Australia and Brazil scheduled to come into production during the outlook period. Substantial iron-ore production growth also is expected in India and China in response to strong demand from their respective steel industries.