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Goldman Sachs Group analysts believe that global steel markets will remain in a tight supply and demand balance for some time to come because of recent fast growth in demand relative to limited growth in supply.
Mr Sal Tharani analyst at Goldman Sachs New York offices wrote to clients that “Over the last few months, global demand has exceeded supply, creating a shortage of steel. This scenario could continue for through 2017.”
Mr Tharani said that “There have been new pockets of demand expanding in the Middle East, BRIC countries of Brazil, Russia, India and China and other emerging economies which are pressuring the 1.5 billion tonnes of global supply. This will sustain high global stele pricing, because of high raw material input costs and the higher expenses and longer lead times associated with adding new steelmaking capacity.”
Goldman Sachs expects that the world demand trend to remain strong and pressure production to 2.6 billion tonne by 2017. Mr Tharani said that he is quite certain that the forecasted 450 million tonne to 500 million tonne of new steelmaking capacity needed to meet this demand trend will be difficult to bring on line over that 10 year period and may fall well short of that target.
He said that “The emergence of China as a global growth engine has changed this since the beginning of this decade. Upshot: Over the past seven years, global steel production has grown by around 7%, primarily due to unprecedented demand in China and, lately, the other BRIC and developing countries.”
Looking ahead, Mr Tharani wrote that “Between BRICs and other emerging developing countries, more than half of the world population is going through a growth phase, which will require immense amount of steel, in our view. Steel demand growth rate in a country is the highest when a nation is in a rapid developmental phase. Generally the biggest spending in this phase is on infrastructure build up which could include housing, roads, bridges, water and sewage systems, communication networks, airports, etc. Although there is increasing demand from industrial and consumer durables as well, construction and infrastructure sectors are the biggest source of steel demand. Steel obviously is an important input in developing these sectors.”
He forecasts that the bulk, about 85%, of new steel production capacity, or 480 million tonnes will come from the traditional blast furnace process, which uses iron ore and coking coal as input materials. China will continue to increase its steel capacity, albeit at a lower rate than the past 7 years. So, it will remain dependent on imports of iron ore to feed its growing steel capacity, in our view. India and Brazil, which are both rich in iron ore are also expected to increase their steel capacity considerably over the coming decade.
Mr Tharani added that most steelmaking firms worldwide will be reluctant to put large Greenfield projects using electric arc furnace technology, due to limited availability of scrap.
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