Severstal Annual Report 2015 Home > Strategic Review > Market Trends

Market Trends

Market conditions in 2015 remained challenging, with global GDP growth slowing in 2015 to 2.4% year-on-year, compared with 2.6% in 2014. The slowdown predominantly affected emerging and developing economies while major high-income countries saw a slight recovery. The largest developing markets Brazil, Russia, China, and South Africa showed rather disappointing results.

A period of modest growth in the metals and mining sector was characterised by lower commodity and steel prices, reduced steel consumption and severe oversupply issues. Global steel consumption and production decreased 3% in 2015 for the first time since 2009. Steel consumption declined in the majority of regions with several exceptions such as India, the European Union, Turkey, the ASEAN. Declining commodity prices caused a global fall of capital investment in mining which also impacted global steel demand. Chinese steel consumption decreased by more than 5%, which means the second consecutive year of decline. The construction industry in China is significantly depressed by excessive inventories of residential buildings and a slump in investments in heavy industries struggling from overcapacity.

Chinese producers were forced to increase export volumes to address severe domestic oversupply and falling domestic demand. Chinese exports dramatically increased to 112 million tonnes in 2015 causing global prices to decline and triggering trade tensions around the world. It is unclear whether China will be able to sustain record volumes or whether protectionism around the globe will curb Chinese exports. So far, India, the United States and Indonesia have imposed duties on steel imports from China, and measures are under consideration in the European Union (EU) and Australia. 

Raw materials prices fell on the back of weak demand and excessive capacity. The collapse in commodities prices had a negative impact on the national currencies of major resource exporting countries, which devalued. This had the effect of reducing production costs which enabled companies to maintain their production volumes, thereby exacerbating the oversupply in the market whilst demand was weakening.

Overcapacity remains the key issue driving low prices in the industry and this did not change much in 2015. Nevertheless there are some signs of improvement. China announced plans to cut steel production capacity by 100-150 million tonnes over five years and reduce coal production to address a glut in the market. The move by China to become more focused on consumer and services industries is giving confidence that the country’s economy should return to growth.

Russia and Europe have remained key markets in 2015 for Severstal due to the geographical location of Severstal’s assets.

Average HRC EU price (US$/t)

Euro Area GDP growth in 2015 increased to 1.5% year-on-year, from 0.9% in 2014. The main drivers of this acceleration are domestic demand strengthening, low oil prices, euro depreciation and improving financing conditions. Nevertheless, EU steel prices experienced pressure from the international markets. A surge in imports caused the European Commission to introduce a number of protectionist policies including anti-dumping duties on cold–rolled coil from Russia and China.

Benchmark iron ore price
(62% Fe, CFR China)

Benchmark coking coal price
(HCC, FOB Australia)

The European economy is expected to grow even faster in 2016 with Eurozone GDP up by 1.7% and UK GDP up by 2.2% (IMF forecast). The main risks will be associated with high government debt (at 95% in Eurozone), a fiscal deficit (at 2.4%) and unemployment (11%). Further euro depreciation will provide some upside for export-oriented machinery (automotive, heavy engineering) and this will have a positive impact on steel demand in Europe.

Average HRC export price (US$/t)

The Russian economy was hit hard by weakening oil prices, as GDP shrank by 3.7% year-on-year in 2015 and apparent steel consumption collapsed by 8-9% year-on-year. The main drivers of the slowdown in domestic steel demand are a reduction in real disposable household incomes, mortgage rates increase, a decline in investments due to economic uncertainty and low credit availability. Fixed capital investments declined by 8.4% in 2015. Construction activity in Russia was subdued by high interest rates, investments slowdown and falling real incomes. The value of construction work fell by 7% in 2015. Residential buildings completions decreased marginally from 84.2 mln sq.m. to 83.8 mln sq.m. supported by a backlog of projects started several years ago during better economic conditions. At the same time mortgage lending collapsed by 35% in 2015. Consumption of large-diameter pipes was the only surging market segment on the back of the implementation of large-scale pipeline projects (“Power of Siberia”).

The fall in oil prices led to rouble depreciation which supported domestic steel producers in improving their position on the global cost curve. Due to the strong historical correlation between global iron ore prices and oil prices, vertically integrated steel producers in Russia are able to remain competitive even in periods of low global iron ore prices. Whilst in the short-term Russian domestic demand has suffered from lower oil prices, in the long-term depreciation creates outstanding opportunities for import substitution and exports in manufacturing sectors, and challenges the “resource curse”.

Share |
Russian version