Sean Gallup, Getty Images
A ThyssenKrupp worker tags a block of heated steel in Duisberg Germany

Is Steel's Big Comeback Running Out of Steam?

Aug. 11, 2016
After eight years of misery, 2016 has been something of a boon for the steel industry. But will China and its record exports keep undercutting prices and end the good times?

After eight years of misery, 2016 has been something of a boon for the steel industry. The big question: can it keep the winning run going?

While many steelmakers surprised analysts with better profits and the stocks enjoyed the best rally in years, the industry’s biggest problem hasn’t been solved. China still exports at a record rate and there are hundreds of millions of tons of surplus capacity around the world still undercutting prices.

“We don’t think, at this point, that the recovery is sustainable,” said Alon Olsha, an analyst at Macquarie Group Ltd. in London. “There remains a huge amount of overcapacity in steel and latent capacity that can easily be turned back on.”

The biggest sign that the recovery in steel is almost over — prices have started to turn south, and even ArcelorMittal recently warned that momentum is slowing. At the beginning of the year, steel prices rallied with the speculative fever in iron ore and signs that extra stimulus would spark a recovery in the Chinese economy. Prices peaked in late April, and have since weakened.

In July, China’s steel exports jumped 5.8% year-on-year to 10.3 million tons. For comparison, the U.K. produces 12 million tons a year. China exported 67.4 million tons in the first seven months of the year, a record for the period.

U.S. Steel Corp. is already moving to capture some of the benefits from its 192% surge this year and government efforts to stem a tide of cheap imports. The Pittsburgh-based producer said on Monday that it was tapping shareholders for about $439 million to give it more financial flexibility. In July, the company reported a narrower loss than analysts expected.

ArcelorMitta reported its best quarterly profit since 2014 as deep cost cuts started to pay off and steel prices rebounded. The industry continues to face the challenges of “structural overcapacity,” CEO Lakshmi Mittal said in a statement last month.

Thyssenkrupp AG, Germany’s largest steelmaker, today reported earnings that beat analyst estimates. Still, third-quarter profit fell 18% from a year earlier as Chinese exports continued to put pressure on prices.

“We expect market conditions to remain challenging in the second half of the year with uncertainties around prices and level of imports from Asia,” Moody’s Investor Service said in a report to investors last week. The second half “should see mounting pressure on prices in all regions.”

By Thomas Biesheuvel

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Licensed content from Bloomberg, copyright 2016.

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