While many steel makers surprised analysts with better profits and the stocks enjoyed the best rally in years, the industry’s biggest problem hasn’t been solved.Oliver Bunic/Bloomberg
After eight years of misery, 2016 has been something of a boon for the steel industry. The big question is can they keep the winning run going?
While many steel makers 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 tonnes 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 per cent year-on-year to 10.3 million tonnes. For comparison, Britain produces 12 million tonnes a year.
China exported 67.4 million tonnes 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-per-cent surge this year and government efforts to stem a tide of cheap imports. The Pittsburgh-based producer said on Monday it was tapping shareholders for about $439-million (U.S.) to give it more financial flexibility. In July, the company reported a narrower loss than analysts expected.
ArcelorMittal 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," chief executive officer Lakshmi Mittal said in a statement last month.
ThyssenKrupp AG, Germany's largest steel maker, today reported earnings that beat analyst estimates. Still, third-quarter profit fell 18 per cent from a year earlier as Chinese exports continued to pressure the industry. The company doesn't expect higher steel prices.
"Prices are currently rather flattening," chief financial officer Guido Kerkhoff said in an interview with Bloomberg Television.
Kloeckner & Co. KG auf Aktien, another German producer, said last week that it expects U.S. sheet-steel prices to fall by as much as 15 per cent until year-end and doesn't expect a further steel price recovery in Europe in that period.
"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."