The Merchant Slab Market Strategic Outlook to 2020 What is the market price outlook for dedicated, occasional, partial suppliers/buyers of merchant slabs? Will the market be characterised by excess merchant slab capacity? What is the cost position of major slab suppliers and how do they compare to integrated suppliers? NEW for 2010 Undeniably Metal Bulletin Research is an information provider throwing an objective light on often bifurcated information. Essential! Krista Van Bergen, SteelFORCE Asia NV
In order to give a definitive market size for a year, we have taken the arithmetic mean. By this evaluation, we estimate that the international merchant market grew from 25m tpy in 2002-03 to 33-34m tpy by 2006-07. However, it dipped slightly in 2008 and dropped by around a third in 2009. 1.2 Slab market supply by country The table on the following page highlights total slab supply (exports) by country. As the chart below highlights, slab supply is relatively consolidated. Russia and Ukraine in 2008 supplied over 40% of the global market with Japan and Brazil a further 10% and 13% respectively. The UK and Mexico supplied more than 2m tonnes each. These 6 countries accounted for nearly 80% of the global slab supply. Beyond this however, and there is a long tail of slab supply. An additional 12 countries supplied between 100,000 tonnes to 1m tonnes, while a further 12 countries have supplied either more than 100,000 tonnes during one year over the last five, or have averaged more than 25,000 tpy. These tail companies supplied over 20% of the market in 2008. 1
Novolipetsk (NLMK) This is the largest Russian supplier, and the largest stand-alone slab supplier in the world. As of end- 2009, it has a capacity of 11.8m tonnes of slab and 5.3m tonnes of HR products. However, this includes upgraded furnace and caster work that was completed in 2009 and is part of a four-year process to increase slab capacity to 12.4m tpy by 2012 from 9.3m tpy in 2007. However, realistic operating capacity in 2010 remains around 10.5m tpy of slab. Slab sales in 2007 and 2008 were 3.7m tonnes. Some of this was dedicated to overseas subsidiaries. It sells: 500,000 tpy to Dansteel in Denmark, potentially rising to 600,000 tpy by 2011 following currently stalled upgrades to Dansteel, although sales dropped to around 200,000 tpy in 2009 and in MBR s view are unlikely to return to the 500,000 tpy level until 2012. It also supplies 1.8m tonnes to the Duferco Group, with which it has a joint-venture. This includes Italian, Belgian and US assets. These were to rise to 2.8m tonnes by 2012 as these facilities increased capacity. However, many of those plans have now been postponed. Beta Steel. In 2008, it bought the Beta Steel assets in the USA, with a nominal capacity of 700,000 tpy of slab and 1.1m tpy of HR coil. The company planned to supply the additional 400,000 tpy of slab. However, poor markets in 2009 meant volumes were significantly below this. In 2008 therefore, it sold around 2.3m tonnes to its own partners and 1.4m tonnes as merchant. Sales were sharply lower in 2009, although they improved in the second half of the year with monthly exports in December peaking at 360,000 tonnes. We estimate that total sales were 3.1m tonnes for the year. As well as expanding slab capacity to 12.4m tonnes by 2012, it is upgrading its own HR coil line to 6.0m tpy. By 2012, its plan is to sell 4.6m tpy of slab, of which 3.4m tpy will be to its own partners and 1.2m tpy will be to the open market. 2
NLMK has a low position on the cost curve thanks to efficient production and backwards integration. In Q4 2009, we estimate that its cash cost of production was $239/tonne ex-works. It took some leverage to expand at the peak of the market, but not as excessive as some of its competitors. The company remains exposed to slab markets for up to half its production, and has some operational risk if jointventures break up of heavy exposure to the merchant market. Novolipetsk SWOT summary STRENGTHS Consistently low position on cost curve Integrated backwards in iron ore and partly coal Efficient & modern operations after investment Reduced its dependence on external sales Single-site efficiencies OPPORTUNITIES Completion of investment programme to lower costs Further finishing assets may become available Increased downstream assets WEAKNESSES Slab accounts for half of sales Low average value of sales Finishing operations in mature economies - low growth THREATS Loss of key markets such as Turkey Low operating rates at downstream partners Break-up of joint-venture with Duferco Source: MBR 3
Merchant slab market out to 2020 In section 1, we noted that the merchant slab market had grown from 25m tonnes to 35m tonnes over the last five years. In our view, there are three drivers for the merchant slab market: The primary development of the merchant slab market is driven by cost or what we call the deintegrated model. Access to low steelmaking costs for manufacturing slab replaces high-cost steelmaking, while retaining finishing operations close to consumption. This is driving investments such as TKS in Brazil, where slab is being manufactured, and then being shipped to finishing facilities in Germany and the USA. The lower cost of the slab manufacture more than offsets shipping and other costs and allows finished steel to be manufactured at a lower cost than its local competitors. For this to be effective, there needs to be a close relationship between the slab producer(s) and the finishing plants in order to ensure sufficient baseload volumes and on-time delivery. We note that much of this investment was given the go-ahead in 2002-03, when steel prices were very low and high-cost steelmaking was unprofitable. For a stand-alone finishing operation, the model requires a reasonable number of merchant slab providers that will be willing to provide regular shipments and provide a competitive supply source. Some finishing operations (e.g. CSI) have parents that have a vested interest in maintaining sales or have long-term agreements (e.g. Ternium Imsa with ArcelorMittal Lazaro Cardenas) for baseload slab supply. The next most important driver is the supplemental finishing model. This is essentially used when steel demand is high and there are physical constraints on the manufacture of steel, and supplemental slab is purchased to maximise output on under-utilised finishing lines. For the merchant slab provider, this requires an ability to shift production levels higher in times of strong demand. In what can be the inverse of the supplemental finishing capacity driver is the very low-priced market or what we would term the replacement model. When the steel price moves below operating costs of production, some higher-cost steel mills can be idled, but replaced with bought-in slab. However, this assumes that the slab cost is below the cost of production. 5
Total slab imports (000 tonnes) 2002 2003 2004 2005 2006 2007 2008 2009 South Korea 2,172 2,462 2,778 3,029 3,356 4,641 4,479 3,938 China 1,826 3,446 2,024 699 77 48 22 3,065 Taiwan 2,317 3,334 4,093 4,845 3,486 3,795 4,042 3,285 USA 6,446 2,992 5,120 4,774 7,080 4,858 4,478 2,250 Thailand 2,940 2,173 2,318 3,476 2,084 1,295 2,096 1,807 Italy 1,110 1,553 2,122 2,635 2,975 3,215 3,136 1,539 Belgium 746 2,184 1,485 1,990 1,564 1,646 1,673 1,492 Indonesia 605 728 918 985 1,577 1,519 1,824 1,015 Mexico 435 299 181 579 769 630 538 455 France 800 798 880 958 888 1,308 1,076 453 Turkey 2,084 2,561 1,028 1,590 1,978 1,247 850 445 Germany 407 600 966 1,477 1,390 2,028 1,992 308 Serbia 91 20 159 157 135 286 67 253 Denmark 70 586 586 525 546 646 593 309 Iran 90 164 202 430 217 874 392 195 Philippines 0 0 0 93 276 319 250 185 Netherlands 11 11 13 19 20 106 130 146 UK 1,201 354 419 425 715 560 265 142 Hungary 38 36 12 61 304 103 237 125 Czech Republic 15 41 86 188 126 186 319 124 India 27 2 42 92 156 155 261 115 Poland 6 48 57 33 236 422 372 104 Macedonia 92 110 182 204 338 369 235 77 Malaysia 149 112 200 337 366 370 182 65 Canada 819 503 717 756 630 95 10 65 Spain 124 161 135 77 319 136 219 35 Sweden 9 15 26 20 63 34 55 25 Vietnam 88 54 94 34 146 185 88 22 Japan 4 1 74 225 45 206 117 18 Austria 47 31 104 44 72 116 117 18 Egypt 283 13 37 352 318 7 7 12 Romania 200 39 112 127 41 338 81 10 South Africa 4 5 2 14 45 83 1 0 Saudi Arabia 15 72 55 137 197 32 40 0 Others 594 349 1,360 208 857 63 264 151 Total 25,865 25,852 28,584 31,592 33,392 31,921 30,508 22,248 Notes: In order to be ranked, a country must average 25,000 tpy or have purchased at least 100,000 tonnes in a single year over the last five Source: Trade statistics, SEAISI, MBR 4
The Merchant Slab Market Strategic Outlook to 2020 PLEASE SELECT: UK 7995 US$13120 8740 order before May 31 2010 and get a 10% discount. Call +44 (0) 20 7779 7999 MBR0049 Study published february 2010 Other relevant Metal Bulletin Research publications include: :: Steel raw Materials: Weekly Market Tracker :: Steel: Weekly Market Tracker :: Global Steel Cost Service :: The New China Effect: China s Steel & raw Materials Industries & their Global Impact :: The Indian Steel Industry: Market Projections & Company Strategies out to 2015 :: Welded Steel Tube and Pipe :: The five Year outlook for the Global octg Market :: Seamless Steel Tube and Pipe :: The five Year outlook for the Large-diameter Linepipe Market :: A New Era for the Middle East & North African Steel Industry: five Year outlook :: North American Steel Markets