The new era in steel Post China supply side reforms and the … · 2020. 8. 4. · The new era in steel –Post China supply side reforms and the outlook for steelmaking in SE Asia

The new era in steel – Post China supply side reforms and the outlook for steelmaking in SE Asia

SEAISI Conference, Bangkok, 17-20 June 2019

Prepared by:

Matthew Poole

Divisional Director, CRU Consulting

Alex Zhirui JI

Consultant, CRU Consulting

Arshiya Sibia

SE Asia Steel Analyst, CRU

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2

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Source: CRU 3


Global apparent steel consumption, Mt

0

500

1000

1500

2000

2500

1997 2002 2007 2012 2017 2022 2027 2032

China World ex-China

2030

Regional

consolidation China super-cycle

Global

oversupplyProtectionism Post China supply side reform

Global Financial

Crisis

Eurozone

crisis

1st China

peak

steel

European consolidation

‘wave 2’

Chines supply side

reforms

China

consolidation

wave?

US industry rebirth


‘wave 1’

Baowu

Steel

formed

Arcelor

Mittal

formed

The global steel timeline – have we moved into a new era for steel?

Source: CRU 4


0

0

LHS: Global apparent steel consumption, Mt

RHS: German rebar and HRC prices1, $/t

Note: price from parity point

0

400

800

1200

1600

2000

0

500

1000

1500

2000

2500

1997 2002 2007 2012 2017 2022 2027 2032

China World ex-China HRC Rebar

2030

Regional

consolidation China super-cycle

Global


Global Financial

Crisis

Eurozone

crisis

1st China

peak

steel


‘wave 2’

Chines supply side

reforms

China

consolidation

wave?

US industry rebirth


‘wave 1’

Baowu

Steel

formed

Arcelor

Mittal

formed


Source: CRU 5


0

0

LHS: Global apparent steel consumption, Mt

RHS: Industry profitability (% EBITDA/Sales margin)

-5%

10%

25%

40%

55%

0

500

1000

1500

2000

2500

1997 2002 2007 2012 2017 2022 2027 2032

China World ex-China

Regional consolidation China super-cycleGlobal


Global Financial

Crisis

Eurozone

crisis

1st China

peak

steel


‘wave 2’

Chines supply side

reforms

China

consolidation

wave?

US industry rebirth


‘wave 1’

Baowu

Steel

formed

Arcelor

Mittal

formed

2030


Source: CRU 6


LHS: Chinese capacity and crude steel production, Mt

RHS: Chinese steel capacity utilisation, %

65%

70%

75%

80%

85%

90%

95%

300

500

700

900

1,100

1,300

1,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Carbon crude capacity Carbon crude production Capacity utilisation

China has achieved a remarkable supply side reform in recent years –this has been the main driver of improved industry profitability globally

300

500

700

900

Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/18 Jan/19

Rebar HR Coil

Rebar and HRC prices since 2010

Prices FOB Midwest, $/st

Source: CRU 7


Trade

investigation

rules revamped

in 2015, litany

of steel AD/CVD

cases filed in

2016

Section 232

implemented in

2018

2014 oil price

collapse

reduces steel

demand,

imports rise

A new era of ‘protectionism’ has also come about, most notably in the USA which have helped lift domestic prices…


8Source: CRU

840

13-17 2018 19-23

China

-1% 0%

201

13-17 2018 19-23

Europe

2% 2%128

13-17 2018 19-23

N.America

0% 1%

34

13-17 2018 19-23

C&S America

-5% 4%66

13-17 2018 19-23

SE Asia

4% 4%

379

13-17 2018 19-23

RoW

2% 2%

56

13-17 2018 19-23

CIS

-1% 2%

The global finished steel demand outlook is as follows….

1673

0

1000

2000

13-17 2018 19-23

World

0.4% 1%

Finished steel demand, Mt

Growth, CAGR%

Source: CRU 9


840

13-17 2018 19-23

China

-1% 0%

201

13-17 2018 19-23

Europe

1% 2%118

13-17 2018 19-23

N.America

0% 2%

34

13-17 2018 19-23

C&S America

-4% 3%38

13-17 2018 19-23

SE Asia

7% 6%

380

13-17 2018 19-23

RoW

3% 2%

69

13-17 2018 19-23

CIS

-1% 2%

With the global supply outlook looking like this….

1681

0

1000

2000

13-17 2018 19-23

World

0.3% 1%

Finished steel supply, Mt

Growth, CAGR%

Source: CRU 10


40

207

32

3017

17

37

22 5 3 20 0 2

0

50

100

150

200

250

y-axis: added capacity, 2018-2023, Mtx-axis: region

Over 200 Mt of capacity is to be added by 2023 which will reduce capacity utilisation globally…

11


● China supply side reforms here to stay.

● China’s willingness to provide fiscal

stimulus to support domestic demand

● Headroom for growth in steel

consumption per capita in many

countries / regions

● Trade protection measures boost

(local) industry profitability in short to

medium term

● Renewed appetite for consolidation

● Evidence of demand softening in some

regions – having to absorb price

increases in raw materials.

● China’s ‘room to manoeuvre’ on fiscal

stimulus reducing.

● Increases in capacity vs demand

growth globally – resulting in lower

capacity utilisation overall

● ‘Over protectionism’ can destroy

demand in long term and encourage

poor capital allocation decisions

Reasons to be optimistic Words of caution

The next 5 years will tell us if the global steel industry has learnt from the past and has genuinely entered a new era of structurally improved returns

Part II - Outlook for steelmaking in SE Asia

12


Indonesia

0

4

8

2015

2018

2023

Thailand

0

4

8

2015

2018

2023

SE Asia will remain a net importer of steel over the next 5 years…

Source: CRU 13


Other Southeast

Asia

0

4

8

12

2015

2018

2023

Net imports, Mt

Malaysia

0

4

8

2015

2018

2023

Vietnam

0

4

8

20

15

20

18

20

23

…but with potentially 52 Mt/y of crude steel capacity to come on stream in the medium to long-term…

Source: CRU 14


52 Mt/y -Total potential (long term)

Malaysia Vietnam Indonesia Philippines

18 Mt/y - Ongoing or completed (next 3 years)

…the potential for over-capacity in the region exists - some countries could be net exporters of steel within 5 – 10 years

Source: CRU 15


52 Mt/y – Total potential additional capacity

Malaysia Vietnam Indonesia Philippines

If capacity utilisation

reaches above 75%

across all new plants,

South East Asia will

become a net exporter

of steel

Excess Capacity => potential net exporter of steel

Indonesia

Philippines and

other Southeast

AsiaMalaysia

Thailand

Vietnam

0

100

200

300

400

500

600

700

economic costs by country/region, Best practice plants, $/t,

Source: CRU 16


0

100

200

300

400

500

600

economic costs by country/region, Best practice plants, $/t,

1Mt ‘best available technology’ plant

3Mt ‘best available technology’ plant

CRU’s strategic cost analysis shows that technology and capacity choice can have an important bearing on cost competitiveness…

17


Critical Success Factor (CSF) Potential Strategies Comments

Creating a ‘world class’ SE Asian steel industry requires strategies in the following areas…

● Technology selection

● Scale / capacity

● Invest in best available technology

Benchmark vs global

competitors to be competitive

in export markets

Cost competitiveness

● Identify long term needs of key end-use sectors

● Invest in product capability accordingly

● Strategic alliances and partnerships can

accelerate development (eg Automotive)

Focus on product capability

and mix as much as / more

than volume and capacity

Product capability

● Invest in ‘pre-competitive’ and collaborative

market development with end-use sector

partners

Look at other regions /

countries for models of

successful market

development eg UK steel

intensive construction sector?

Market development

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● The history of the global steel industry over the past 20+

years indicates a number of ‘eras’, with varying degrees of

industry profitability.

● We are in the era of ‘post China supply side reform and

renewed protectionism’ – industry profits have rallied

since the global over supply crisis of 2015/6 but are set to

fall from a peak in 2018.

● The next five years will show if the industry can and has

moved to a new era of structurally improved returns –

there are forces both for and against this happening.

● SE Asia will account for 23% of the global growth in

demand for steel and 26% of additional capacity globally

over the next five years.

● Further new capacity proposed (c.34Mt) has the

potential to tip SE Asia into being a net exporter of

steel within 5 – 10 years.

● Technology selection will be key to delivering a

globally competitive SE Asian steel industry.

● Other critical success factors include investment in

product capability and market development –

partnerships are essential!

● A ‘joined up’ industrial strategy with key end-use

sectors in the region will help deliver a world class

SE Asian steel industry.

Are we in a new era for steel?

CRU International Limited

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Registered in England No.940750. Registered office: Charles House, 108-110 Finchley Road, London NW3 5JJ

Thank you.

Any Questions?

19

Prepared by:

Matthew Poole

Divisional Director, CRU Consulting

Alex Zhirui JI

Consultant, CRU Consulting

Arshiya Sibia

SE Asia Steel Analyst, CRU

Source: CRU 20


-2000

0

2000

4000

6000

8000

10000

SEA w/ 50% Chinese buildcosts (Chinese WACC)

SEA w/ Chinese build costs(Chinese WACC)

SEA w/ Chinese build costs(local WACC)

Developed economy

Net Present Value of Hypothetical projects (billet exporter) (post tax)

NPV, $m

Chinese led capacity investments in SE Asia show the highest return…

21

Short term: Stimulus is smaller % of GDP than past and is mainly in the form of tax cuts

4.0 4.03.7

0

2

4

6

8

10

12

14

2008-10 2015-16 2018-19

Stimulus as % of GDP

The latest fiscal stimulus is considerably

smaller than 2008-10 or 2015-16

% of GDP

0

2

4

6

8

10

12

14

2008-10 2015-16 2018-19

Other

Taxes

Type of fiscal stimulus matters: 2018–19

has a higher proportion of tax cuts than

other stimulus% of GDP

22

With the success of recent supply reforms, we expect a ‘Phase 2’ of reforms focused

on optimisation of existing capacity● Reforms have so far focused on crude steel, where utilisation rates have increased in the last two years, leading

to higher industry profitability. Following a period of weak and unsustainable margins, industry EBITDA margins

increased, on average, to 13% in 2017 and 17% in 2018.

● CRU’s current view is ‘Industry Reform Phase Two’ will probably begin in pilot regions, with policies revised

before a full national rollout. Rules may be announced to restrict existing capacity as well as new additions,

incentivising M&A to drive growth. This new phase of the reforms also looks set to support the ongoing “battle for

blue sky” if facilities can be relocated away from areas suffering from poor air quality.

Phase 2 is expected to focus on optimising the downstream sector

- Induction

furnaces

- Closures

- Swap

programme

- Additions / creep

Phase

1

Phase

2

- Products

- Location

- Ownership

- Production

efficiency

Reduce

crude steel

capacity

Optimise

capacity

structure

Actual and forecast outcomes

-244 Mt net capacity

reduced by 2023

Improved industry

EBITDA by 2017

Possible Outcomes

Better EBITDA

downstream

M&A: consolidation

Assets more focused

on high value

Production efficiency

23

-439

million

tonnes

gross

capacity

closures*

+195

million

tonnes

new

capacity*

* The capacity swap programme so

far includes 149 Mt of closures and

133 Mt of replacement capacity

-244 million

tonnes

Net reduction of crude steel

capacity by 2023 (since 2015)

from Phase 1 of the Chinese

steel industry reforms

● In mid January 2019, the chairman of the Chinse Iron and Steel Association (CISA) was reported in the press saying how China’s steel industry will this year

switch from reducing overall capacity to focusing on optimising capacity structure, including the nature of products, location and ownership. This fills a

missing link in the government’s steel industry reform programme. The move to optimise downstream assets in the Chinese steel industry has been a topic

mentioned often in recent months by steel industry participants and is aligned to CRU’s current outlook for the Chinese steel industry.

● Reforms have so far focused on crude steel, where utilisation rates have increased in the last two years, leading to higher industry profitability. Following a

period of weak and unsustainable margins, industry EBITDA margins increased, on average, to 13% in 2017 and 17% in 2018.

● In past years, the government’s move to encourage higher-end steelmaking has supported additional rolling mill capacity. Nevertheless, slower domestic

demand growth in China means a change of direction is now necessary. The effect has been greatest for flat products, where weaker consumption in 2018

from end-use sectors such as automotive and home appliances prevented higher margins from cold rolled and coated sheet products.

● CRU’s current view is ‘Industry Reform Phase Two’ will probably begin in pilot regions, with policies revised before a full national rollout. Although Chinese

rolling capacity is large in size, the scattered nature of assets across the country makes it difficult to tackle. As such, a probable place to start the programme

will be major provinces with these rolling assets such as Shandong and Guangdong. In addition, rules may be announced to restrict existing capacity as well

as new additions, incentivising M&A to drive growth. This new phase of the reforms also looks set to support the ongoing “battle for blue sky” if facilities can be

relocated away from areas suffering from poor air quality.

Phase 1 reforms focussed on utilisation rates & profitability Phase 2 is expected to focus on optimising the downstream sector

- Induction

furnaces (IF)

- Closures

- Swap

programme

- Additions /

creep

Phase

1

Phase

2

- Products

- Location

- Ownership

- Production

efficiency

Reduce

crude steel

capacity

Optimise

capacity

structure

Actual and forecast

outcomes

-244 Mt net capacity

reduced by 2023

Improved industry

EBITDA by 2017

Possible Outcomes

Better EBITDA

downstream

M&A: consolidation

Assets more focused

on high value

Production efficiency

With the success of the supply reforms, we expect them to enter ‘Phase 2’ and now focus onoptimisation of existing capacity

24

Documents

The new era in steel Post China supply side reforms and the … · 2020. 8. 4. · The new era in steel –Post China supply side reforms and the outlook for steelmaking in SE Asia