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Global steel overcapacity: risk reaches a high in 2016

Global steel overcapacity: risk reaches a high in 2016 article image

Following a long period of increasing demand over the past decade – driven by China – steel is suffering from weak growth in the global economy.

In its latest report on the global steel industry, Coface, a worldwide leader in trade credit insurance, warns of an increasing credit risk throughout much of the world.

In 2014, China accounted for 45% of the world's total steel production.

Now, however, its appetite is waning, with a -3.3% contraction in 2014 and -5% consumption in 2015.

Meanwhile, China’s production capacity has continued to increase, heightening the global imbalance between supply and demand. While global production is weakening (-3.1% at end February 2016) and one-third of steel production lines are at a standstill, supply is still abundant.

In February this year the Chinese government announced the first reduction

in production capacity – by 40 million tonnes.

Global steel prices have been severely depressed by excessive production capacity around the world. 

China is now exporting its production surplus (+20% in volume in 2015), which is particularly weakening steel production structures in Europe, the US and emerging countries.

Australia hard hit

Australia is one of several countries hard hit by the global steel crisis.

Arrium, Australia's only manufacturer of steel long products, is in voluntary administration with debts of $4 billion, and workers at the company’s Whyalla steelworks are facing an uncertain future.

Cheap steel imports and falling global demand have been the main reasons for the company’s downfall.

Now the Chinese economy is undergoing structural changes. Manufacturing is giving way to the expanding services sector in China’s growth model.

The country’s domestic consumption of steel has already reached its peak and will continue to decline.

Coface has seen a gradual downgrading of credit risks in global metal production.

Very high risk

The sector is the most at risk among the 12 structures assessed by Coface.

It is now assessed as "very high risk” in Latin America, emerging Asia, the Middle East and Western Europe, and "high risk” in Central Europe and North America.

In fact, it is one of the least profitable sectors in the world (ranked 90th out of 94) and the deepest in debt. China's price competitiveness (especially for low-end steel) is weakening steel producers around the world.

Current overcapacity is also weighing down on credit risks in China and corporate indebtedness is rising significantly.

Positive perspectives

According to Coface the steel market is not expected to regain equilibrium before 2018.

“The rebalancing of supply and demand could be possible from 2018,” notes Coface.

The three sectors that use the most steel continue to have positive perspectives over the medium term:

  • · The automotive industry has a substantial margin for progression in the emerging economies. For example, in India there are 100 autos per 1000 inhabitants (compared to 808 per 1000 inhabitants in the US)
  • · Machinery is also benefiting from numerous growth relays, both in the emerging markets and in advanced economies

· Finally, construction activity should take off again, thanks to the strong potential for urbanisation in most of the emerging countries. 

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