September 18, 2024

Steel Market Summary - Australia

The Dark Side Of Falling Steel Prices 

As consumers, we are hard-wired into thinking that lower prices must be a good thing. This is especially so when we buy a product regularly, then its price suddenly falls. However, a discounted selling price surely means the vendor´s profit margin is less. Falling prices can also be indicative of an industry in trouble, which is certainly the case with the steel industry at present. We´ll summarise the dark side of cheaper steel later in this summary. But first, let´s look (with false joy) at some of the price reductions since January of this year. As our charts show, wire rod stood at $609 per metric tonne at the start of January but has now fallen almost 18% to $500. China rebar has dropped 21% to $446 m/t. In flat products, HRC North America has fallen 36% from $1210 to its current $774 whilst HRC South-East Asia now stands at $470 m/t which is 21% lower than its January position. HRC China is likewise down 19%. In the steelmaking supply chain, Australian iron ore is an established player. However, its price has plummeted 35% since January. Another key ingredient in steelmaking, coking coal, is now tracking 41% lower than its January level of $323. Little wonder that ASN´s unique Steel Feedstock Index,

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which measures the cost of making one metric tonne of steel, is down 35% since the start of this year. (Steel prices for the past two years can be seen in the “Prices” section in the menu toolbar above).

The root cause of the decline in steel prices is the slowdown in the Chinese economy, and specifically the collapse in its normally steel-hungry property market. Less demand to build houses prompts less demand for steel. Thus, Chinese manufacturers need less iron ore and coking coal, leading to lower prices for both commodities. Vendors such as BHP and Rio Tinto thus make less profit and therefore contribute less in tax receipts to the Australian Government, which has less money to spend on services for its citizens.

In response to reduced domestic demand, steelmakers in China have sought to offload their surplus stock onto the world market. From January – July this year, finished steel exports from China increased 21% on the corresponding period for 2023. Exports to the end of July were 61.2 million metric tonnes (Mm/t), an increase of 10.9 Mm/t. Some analysts forecast total exports for 2024 will top the 2015 record of 110 Mm/t. The steel is being offered at “reduced prices”. China´s competitors call it “dumping” and many have initiated anti-dumping procedures. Irrespective, China´s solution to its problem has caused pain on the global steel market where rival manufacturers have had to cut their profit margins to compete. And so it goes, all the way down the supply chain as margins are squeezed, occasionally to the point of disappearing.

In Australia, one knock-on effect is that BlueScope Steel recently reported a 20% decline in profits for the fiscal year 2024 (FY2024) compared with FY2023. It cited the impact of low Asian steel spreads, driven by high regional steel production and exports, which affect both steel prices and raw material costs. BlueScope is bracing for a possible further 40% decline in underlying earnings before interest and tax (EBIT) in the first half of FY2025. With Australia´s GDP barely in positive range, and with new housing approvals at a decades-low level, fewer houses being built will require less steel. At the other end of the steel supply chain, in the scrap metal sector, Sims Limited´s underlying EBIT for FY2024 was $42.9 million compared to $252.2 million in FY2023. That´s an 83% decrease.

Tucked away in South Australia, the Whyalla steelworks is not protected from the creeping malaise of the global steel market. In August, the steelworks´ owner, GFG Alliance, blamed the global downturn in the steel market for its decision to axe 48 jobs. Now, further lay-offs loom. “To manage through the market downturn, we are reducing fixed costs including maintenance to calibrate with lower market demand,” a spokesperson for GFG Alliance said recently. The statement came after ABC News broadcast concerns by contractors and former employees at the steelworks. On the condition of anonymity, one source said he feared someone would get hurt because not enough preventative maintenance work was being done. Local MP Eddie Hughes has said workers have raised their concerns with him about safety and “the state of the plant”. In response, GFG Alliance said safety remains its number one priority. One local contractor even expressed concern that GFG Alliance no longer intends to make steel in Whyalla and will soon restructure its operating model. “Whatever their long-term intent is, it’s certainly not to be producing steel here because there’s no way they can keep up with the plant with the people they’ve got,” the contractor told the ABC. “The word is they’re going to ship in billet from overseas and do product through their roll mill,” he said. GFG Alliance has said it remains committed to its green iron and steel investment at Whyalla.

Did you know?…..that BHP contributed more than $50 billion in economic value to Australia in the 2024 financial year through wages, dividends, payments to suppliers, taxes, royalties and investments in communities. The company says $22.2 billion of that amount was spent with suppliers and $14.5 billion was made in payments to Australian governments through taxes, royalties and other payments. BHP says its adjusted effective Australian tax rate is 32.1%, increasing to 44.4% including royalties. BHP´s Chief Financial Officer Vandita Pant said: “During the last decade, we paid US $95.1 billion globally in taxes, royalties and other payments to governments, including approximately AUD $107.1 billion in Australia.” Quite a journey from its humble beginnings at Silverton near Broken Hill.

Finally, check out the Sustainability special feature over at AustralianSteel.com

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