By Coface, the international credit insurer.

The South African steel industry has always been prone to volatility. The global market has been particularly tough lately as China’s steel makers have ramped up their exports and cut prices in response to their own slowing domestic growth.

The South African market has been hit from all sides: with cheap imports increasing supply at a time when demand is extremely weak; and sliding global and domestic prices at a time when input costs such as electricity and labour are rising and the supply of these inputs is unreliable.

Low demand is partly due to the failure of government’s infrastructure programme to take off. The expansionary fiscal policies government pursued to support the economy since 2009 were a lot more about consumption spending on public-sector salaries and grants than about investment spending. The steel industry is seeing the consequences.

Production data for the metals and engineering sector released by StatsSA suggest a deepening contraction in the sector. On an annualised basis, production has declined by 3.8% in April 2015 compared to April 2014. Production for the first four months of the year recorded a 3.3% decline compared to the same period in 2014.

The April data released by StatsSA has effectively dashed any hopes that the sector will show any improvement during 2015. It is now clear that the small recovery recorded over the first two months of 2015 was simply a normalisation after the instability of late 2014.

Theoretically, the link between current and future production was in the level of inventories, which increased due to low or declining orders from customers (export or domestic) and as a result production had to be curtailed.

Inventories continue to increase according to data from the Kagiso/BER PMI as well as the BER Quarterly Manufacturing Surveys. Production is expected to slow down even further in the coming months with virtually all the business condition indicators for the sector pointing downwards.

This will inevitably lead to a ‘perfect storm’ with potentially serious consequences for steel companies’ survival and employment.

Global

According to the World Steel Association forecasts, global apparent steel use will increase by 0.5% to 1.544 Mt in 2015 and demand will grow by a further 1.4% in 2016 to reach 1.565 Mt.

A restrained growth outlook for the global steel industry is due mainly to the deceleration in China’s demand which saw negative growth in 2014. The outlook also reflects the influence of major structural adjustments in most economies, particularly owing to limited investment growth after 2008. As these changes take effect, the industry may experience a slower pace of growth in production.

There seems to be increasingly positive news from developed economies, especially signs of firming recovery momentum in the Eurozone. However the industry continues to face some downside risks from certain parts of Europe due to factors such as geopolitical instability, international capital flow volatility and the economic slowdown in China.

Despite continued turbulence around the world, 2014 was another record year for the steel industry. Crude steel production totalled 1.665 Bt, an increase of 1% compared to 2013. 2014 also saw the emergence of a new phase in steel markets.

For the past decade, the steel industry was dominated by events in China. The evidence is that the steel industry is now entering a period of pause before picking up again when markets other than China drive new demand. There is increased optimism about India and growth in steel use in some MENA and ASEAN countries. While these developments will not be enough to counterbalance the deceleration of China, they are expected to gradually improve growth prospects beyond 2016.

China represents around 48% of the global market for steel. This will continue to decline in the years to come.

Projections

The impact of urbanisation will have a key role to play in the future. It is estimated that a little more than 1 billion people will move to towns and cities between now and 2030 and the housing and construction sector is already the largest consumer of steel today, using around 50% of all steel produced.

This major flow will create substantial new demand for steel to be used in infrastructure developments such as water, energy and mass transit systems as well as major construction. By 2050, steel use is projected to increase to be 1.5 times higher than present levels in order to meet the needs of a growing population.