Is now the right time to invest in steel?

Moderate growth in steel demand expected in 2018

According to the World Steel Association global steel demand will reach 1,648.1 Mt. in 2018. Worldsteel forecasts that global steel demand excluding China will reach 882.4 Mt, an increase of 3.0% in 2018.

In October 2017 Mr T.V. Narendran, Chairman of the worldsteel Economics Committee commented, “progress in the global steel market this year to date has been encouraging. We have seen the cyclical upturn broadening and firming throughout the year, leading to better than expected performances for both developed and developing economies, although the MENA region and Turkey have been an exception.

Steel demand 2017-2018

The risks to the global economy that Worldsteel referred to in their April 2017 outlook, such as rising populism/protectionism, US policy shifts, EU election uncertainties and China deceleration, although remaining, have to some extent abated. This leads us to conclude that we now see the best balance of risks since the 2008 economic crisis. However, escalating geopolitical tension in the Korean peninsula, China’s debt problem and rising protectionism in many locations continue to remain risk factors.

In 2018, Worldsteel expects global growth to moderate, mainly due to slower growth in China, while in the rest of the world, steel demand will continue to maintain its current momentum.

So, world steel demand is recovering well, driven largely by cyclical factors rather than structural. The lack of a strong growth engine to replace China and a long term decline in steel intensity due to technological and environmental factors will continue to weigh on steel demand in the future.”

Steel demand will likely grow with another 600Mt by 2030

According to another source on Statista, with a survey time period of 1980 to 2010, steel demand will grow to 2290 million metric tons by 2030. These projections were made under the assumption that productivity improvements be consistent with current policy approaches and projected economic development.

 

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China’s importance on world’s steel demand

China’s demand growth

China accounts for about 45 per cent of world demand.

The positive correlation between global economic growth and steel consumption is well-recognised. From less than 3 per cent in 2016, there has been a modest pick-up in global growth to 3.3 per cent in 2017 and a further increase to 3.6 per cent in 2018 is seen. As said before: For the world market, at present, risks factors include geopolitical tension (friction between the US and North Korea), protectionist tendencies and China’s debt problem.

The Chinese steel industry has been facing environment-related issues as well as trade friction.

China’s Belt and Road initiative

BHP Billiton (BHP.AU) says that China’s Belt and Road initiative could result in up to 150 million tonnes of additional steel demand, which will drive demand for raw materials.

The Belt and Road (BRI) project is President Xi Jinping’s adaptation of the historical Silk Road connecting China with 68 countries covering Eurasia, parts of Africa and Oceania. In a report released in September 2017, the world’s biggest miner identified 400 core infrastructure projects spanning power, railways and pipelines costing an estimated USD1.3 trillion which will ‘help to sustain Chinese steel production run rates at high levels over the next decade”:

Such investment would drive significant demand for construction materials and equipment, leading to an increase in direct and indirect demand for steel. BRI projects could result in up to 150 million tonnes of incremental steel demand. Of that amount, 80 per cent would be used in structures and reinforced concrete, with 20 per cent going into machinery and other equipment. Spread over a 10-year period, this amounts to an additional 15 million tonnes per annum, or 3 per cent to 4 per cent incremental demand growth for steel in BRI regions. This is considerable, as it would double the growth rate of local steel demand observed since 2011.

Additional demand coming from India?

There are indications that India’s steel consumption in the coming years will register robust growth on the back of the government’s thrust on infrastructure development, real estate and automobiles.

In the 2017-18 Budget, an outlay of ₹4 lakh crore for infrastructure expansion, covering railways, roadways, airports, seaports, multi-modal transport and urban amenities, as well as affordable housing to ease dwelling house shortage was made. However, India’s big challenge will be finding funds for capacity expansion. Where will the ₹10 lakh crore come from?

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Where will future steel demand come from?

According to Tata Steel, electric vehicles will increase auto industry steel demand by 4.2m tonnes a year by 2050.

Increasing demand for ultra-low emission vehicles (ULEV) will drive growth in steel supply to the European automotive industry by 4.2 million tonnes. Tata Steel’s study predicts production of steel for vehicle structure, as well as electrical and plated steels, will see a sharp increase if all new vehicles are to have zero emissions by 2050.

Another key growth area for steel will be in the powertrain used in ULEVs, including electric motors and battery cells. Expected to account for a 1.6 million tonne increase in the demand for steel. These components will use greater levels of electrical and plated steels respectively. High performance electrical steels can improve an electric motor’s efficiency, enhancing range and power, while lithium-ion batteries commonly used in ULEVs require advanced plated steel.

A growing number of ULEVs on the road will also cause increased demand on electric infrastructure. Steel will play a key role in the development of ULEV infrastructure, such as charging units and refuelling hubs.

Chris Wooffindin, marketing manager – automotive at Tata Steel, said: “Our report shows steel will be more relevant to the automotive industry than it is today. Many people expected the next generation of vehicles to feature unconventional materials. However, that would not be feasible based on the costs manufacturers and, subsequently, customers would face with electrification.

And ofcourse, steel will also continue to play a role in the energy sector such as offshore wind power.

There are many publicly traded firms to consider when investing in steel

Keep politics in mind!

The Trump administration recently integrated import duties on certain types of Vietnamese steel made from Chinese imports. The president also plans to put one trillion dollars into infrastructure. In addition, relaxed regulations and corporate tax cuts promise to make the materials sector prosperous. So this will boost American steel producers.

However I always prefer to have a stock that pays a nice dividend in my portfolio. So my choice falls on Severstal PAO. Severstal is among the largest manufacturers of steel in Russia, and therefore the world. This company yields more than 11% at the current price. The share price has also done quite well for the last couple of years :

Severstal PAO 5 year chart
Severstal PAO 5 year chart

However, like with more Russian companies, the company is majority-owned and controlled by a millionaire/billionaire. In this case Alexey Mordashov, who is Russia’s richest person. As I mentioned earlier Russian stocks have a nice CAPE ratio. But they also carry some more risk (currency risks, European import restrictions, tariffs et cetera).

It has also started to adopt a digital transformation strategy. Last year, Severstal created the country’s largest industrial data lake. Petabytes of data which was previously discarded during production of thousands of tons of steel each year will now be stored for analysis.

This strategy has been adopted to secure a competitive advantage in the face of growing competition from other steel producing regions, including Asia and Europe. Although these international competitors still generate smaller volumes then Russia’s plants, many have pulled ahead in the technological race, closing the gap.

Also, When you invest in a capital expensive industry, remember to invest in large companies. Large companies benefit from the inverse relationship between the quantity produced and per-unit fixed costs. This is called “economies of scale”.

Conclusion

Although China’s demand might stagnate in the future, growth will probably continue. And with the nice cyclical uptrend in steel demand, I believe steel producing companies will continue to grow in the coming years. Severstal PAO seems like a good investment to me, so that’s why I recently bought some stocks in this company.

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