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February 2016

Bright spots in demand, Gloom in supply

Presentation of a report on Steel and Aluminium for EUnited Metallurgy in Frankfurt.

In their presentation of a special report on end uses for steel and aluminium prepared for EUnited Metallurgy members, CRU Consulting experts Lavan Mahadeva and Colin Pratt discussed the brightest prospects for demand for steel and aluminium in higher value added segments (outside of China). One of their messages was that, as brilliant as these prospects can be, a supplier to metal producers may also have to be aware of the overall gloomy state of supply.

CRU estimates that the gap between global crude steel capacity and production in 2015 has opened up to double what it was in 2005, and about 44% of total global production in 2015.  Roughly two fifths of the gap is accounted for by China. This massive overcapacity has been mirrored in generally low prices and negative or low margins for steel makers worldwide. There have been some closures and idling as a response to these fierce conditions, but the question remains has to how long it will take production to revert to levels consistent with healthier prices and profits. In its  Crude Steel Market Outlooks, CRU monitor and forecast these trends. In our early 2016 issue, we are expecting a slow recovery in prices through the year ahead.

The aluminium industry has also reached a similar state as capacity additions notably in China have outstripped even very strong growth rates of demand in past years.  CRU’s Aluminium Outlook expects that direct-chill mills in Europe and the USA will increasingly concentrate on higher value products such as automotive body sheet while China will penetrate more regions and eventually more product types, including can stock.

There are though some bright spots of demand growth for aluminium and steelmakers and their supporting businesses. One of the highlights of the presentations was a combined discussion of the demand for aluminium and high strength steels in automotive applications. The underlying driver is that we expect new motor vehicles to be of a lighter weight. Less weight seems to be the cheapest route to achieve a high level of energy efficiency without sacrificing size. While ‘lightweighting’ implies a fall in the total steel content of new cars and a rise in (the rolled products) aluminium share, we can also expect a strong tilt towards specialist high strength steels. In some applications high strength steels would compete with aluminium, in others they would complement it. One advantage of specialist steels over aluminium could be a cheaper price. However, the consumer will be the ultimate judge as there are wide range of functionalities which need to be balanced against the vehicle price and running cost.

A forecast for growing demand for these metals is only part of the story. It is often critical to understand the supply-side implications of any shifts in demand. For example most steel producers, and especially integrated producers, are geared towards large volumes of steel production.

A second case study was in the demand for steel in the machinery and equipment sector. Definitions vary but the aim is to capture a sector which produces heavy capital goods of various types and so is a large consumer of steel (often second only to construction). Although some capital machinery remains in the country they were built and is used in the construction of nontraded goods such as buildings, the products of this sector are often traded, and can be used to produce traded products. Thus this sector is an important link in the global value chain in manufacturing. We predict that a pick up in the global trade in goods, which has stagnated since the global financial crisis, could favour this sector and thus provide some impetus into the demand for steel. China’s share of this sector in total manufacturing is already high, and we think new growth could take place elsewhere. In the presentation we presented our forecasts for the new global locations for this sector. 

In conclusion, there are certainly oases of growing demands for high value steel and aluminium. But there is also a legacy of oversupply. For some specialist providers of equipment and services to smelters, it will be sufficient to identify and target specific high value applications of these metals independent of location. Others will also have to plan for where new production will take place.

A full copy of this report is available to EUnited Metallurgy members.


Lavan Mahadeva is Research Director of CRU, Managing Consultant at CRU Consulting.
He has many years of experience as an applied economist interfacing between technical staff and senior decision makers. As CRU’s Research Director, his job is to make sure that our models and methodologies are both rigorous and useful to our clients.

Colin Pratt, Managing Consultant at CRU Consulting, has spent the past 37 years working in commodity market analysis, most of them with CRU, where he headed the aluminium business unit from 1987 to 2002.  During this period, he helped to build up CRU’s aluminium research into the industry leading position it enjoys today. He joined CRU Consulting in 2003 and now works on consulting assignments across the spectrum of metals.

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