Slowing down

As global supply chains continue to be disrupted and commodity prices soar, we look at how the steel market is performing and its effect on freight. 

According to the latest figures from the World Steel Association, global crude steel production totaled 142.7 MMT in February, declining by 5.7% YoY. Although this can largely be attributed to the decline in Chinese production, which fell 10.0% MoM, output in other main producing regions has also dropped. Excluding China, global crude steel production totaled 67.7 MMT in February, the lowest level since September 2020. However, seaborne trade in iron ore has continued relatively unaffected, increasing by 0.4% YoY across January-February of this year. On the other hand, coking coal trade has declined by 8.1% YoY due to steep declines in Chinese demand.

While most producers printed yields below those of February last year, India and the US were more positive. Indian crude steel production totaled 10.1 MMT in February, rising by 7.6% YoY, while US production increased by 1.4% YoY to 6.4 MMT.

Seaborne steel trade, however, has not faced similar downside, increasing by 5.2% YoY to 12.1 MMT in February. Overall, the Supramaxes have benefitted from the growth in this trade at the expense of the smaller Handies. Trade has been buoyed by increasing exports out of Brazil, primarily due to increased demand from the US. Steel liftings to the US from Brazil totaled 929K tonnes across January—February, increasing by 32.4% YoY. Japan has also seen growth in steel exports, totaling 1.1 MMT in February, rising by 24.1% YoY. In terms of destination, these cargoes have been more of a mixed bag with the majority heading to Mexico, Thailand, and the US. The transpacific voyage to the US may see further growth in 2022 after the two countries reached a deal to permit most of the Japanese steel to be imported into the US tariff-free.

China

Following our last update on the Chinese steel market in February, when the country’s steel production had modestly bounced back from the sharp declines in Q4 of last year, it has reversed course. Lockdowns in major steel producing regions such as Tangshan in Hebei province have weighed on output while lockdowns elsewhere have caused significant transportation disruptions. As mills struggle to retrieve their raw material orders, it was reported today producers in Tangshan are likely to cut output as a result. Daily discharge rates for iron ore in Chinese ports has declined to 1.8 MMT, the lowest level in the past 12 months as port operations are affected.

Even though crude steel output in the country has declined, this has not hampered demand for seaborne iron ore to the same extent. Chinese iron ore imports totaled 92.2 MMT in February, declining by 1.5% YoY, following a bumper month in January for iron ore imports that amounted to 112.2 MMT. Coking coal, on the other hand, has not been as strong. Chinese metallurgical coal imports in February totaled 1.7 MMT, decreasing by 33.3% YoY, on the back of a steep decline in volumes from the US, which fell by 1.1 MMT.

Indian output strong

As we mentioned above, Indian crude steel production has been strong so far in 2022 and remained above pre-pandemic levels. To support the recovery following the pandemic, the Indian government has implemented several steel-intensive infrastructure spending policies in place which has incentivized the ramp up in production. This also coincides with the country’s aim to produce 300 MMT of steel by 2030. In 2022 the country’s iron ore imports have more than tripled YoY across January-February to 1.1 MMT as heavy rainfall hindered domestic production.

To diversify their purchasing, Indian mills have sought after coking coal from other sources, such as Russia. In 2021, India imported 4.0 MMT of coking coal from Russia and although India has not sanctioned Russia so far, some major Indian buyers have self-sanctioned Russian product and will have to purchase from elsewhere. Given their already strong trade relationship, it is likely most substituted volumes will come from Australia, resulting in some longer-haul voyages.

Europe to alter imports

European crude steel production totaled 11.7 MMT in February, declining by 2.5% YoY as output continues to slow following a strong 2021. European mills have faced higher costs due to rising carbon prices through the bloc’s emissions trading scheme. So far, this is the only region which includes the ferrous industry under such a system. This has compounded pressure on steel producers in Europe which already face abnormally high energy costs.

The current war in Ukraine has led to the bloc imposing a ban on steel imports from Russia and Belarus, from which it imported on average 467K tonnes per month in the 12 months before the invasion. Russian steel accounted for 25% of European steel imports in 2021, coming to 5.6 MMT. Europe will look elsewhere for these volumes; particularly as domestic producers continue at reduced capacity. As a result, we may see increased volumes from China which more than doubled YoY in 2021 to 1.5 MMT.

Flows in 2022 have further accelerated with 516K tonnes shipped so far, set to be the highest volume for this trade in Q1 since 2016. As easing domestic demand in China persists, there will be more opportunity to export out of the country. To protect domestic producers, the EU has a quota system in place, with different allocations set for exporters around the world. While the ban is in place, Russia’s quota will be redistributed across other steelmaking countries, with Turkey and India set to be allocated additional volumes. While existing contracts have a 3-month transition period to be completed, thereafter it will be difficult for these volumes to head elsewhere as Russia’s main trade partners following the conflict have been other large steel-producing countries, such as Turkey and China.