Gambling on steel trade in 2004--report on the AIIS Spring Conference.

The topic of China dominated the annual meeting of the American Institute for International Steel this year, its demands pushing the former concept of over capacity in steel production out of the frame and also highlighting restrictions on the supply of raw materials.

Given the topsy-turvy

reality of the US steel market, Las Vegas seemed a fitting choice for the mid-March conference of the American Institute for International Steel (AIIS). This market has changed at such a dizzy pace in recent months that a throw of dice at a casino might be as reliable a forecasting tool as a steel expert's computer model.

As has become a tradition at this gathering to discuss issues of trade, the main event was preceded by a press conference. Reporters from major steel and trade publications were present or called in from other locations. In his opening remarks, AIIS chairman W yon Billow (*) was optimistic about the US steel market, which would benefit from faster economic growth this year--4-5% vs 3% last year--and rising manufacturing exports due to the weaker dollar and strong demand for industrial goods in China, India and several other Asian countries. He also warned that the unusually fast rate at which US steelmakers were boosting their prices endangered the financial health of steel-using firms supplying customers in concentrated industries.

The following is an excerpt of the Question & Answer exchange:

Q What is the extent of excess steelmaking capacity?

A In the global context the numbers were never close to those bandied around a few years ago. Moreover, published capacity figures for the USA are not meaningful; they are considerably above what the industry could produce in a tight market.

Q Do steel users have rights under the trade law?

A Under US antidumping and countervailing duty laws, steel users have no legal standing, meaning that measures are taken without regard to the impact they have on the consumers of the product. Under the 201 statute, steel users' interests are only taken into consideration in the final presidential review.

Q Can respondents file petitions for 'changed circumstances' in antidumping cases?

A US steel consumers are not entitled to request a changed-circumstances review of an antidumping case. The importer must make the request on their behalf but even then the request is automatically denied if the domestic industry objects.

Q Has a petition been filed requesting imposition of US scrap export controls?

A Not so far.

INTERNATIONAL STEEL MARKET

The lead session of the conference, which was moderated by AIIS president David Phelps, called for predictions of global steel market conditions in 2004 and the impact of China on those conditions. The first speaker, Karlis Kirsis (*) of World Steel Dynamics, emphasised the Chinese economy has been expanding in leaps and hounds, pushing up steel demand at a phenomenal rate. The result was accelerated investment in Chinese steelmaking capacity plus a surge in steel imports. The latter in turn boosted steel output elsewhere, notably in Japan, Korea and the CIS region. For a while this did not impose undue stress on the world's resources but by the fall of last year the slack in global raw material markets and ocean-shipping capacity began to vanish. Prices of scrap and coke soared, while shipping rates doubled, then tripled. Fig 1 illustrates typical trends since the start of 2000. Mr Kirsis furnished up-to-date prices and price trends for key steelmaking inputs, including scrap in the USA, coke exported from China, Brazilian iron ore and pig iron, in addition to metallurgical coal, crude oil and natural gas. He admitted that it was difficult to keep up with the frenzy of upward revisions in steel prices. Indeed, by the time he was speaking his peak price estimates for 2004 had already been exceeded for Sections and Hot Rolled Coil. Nevertheless, he put the chance of prices dropping later this year at 70%.

[FIGURE 1 OMITTED]

His 2003-2004 US balance estimates are summarised in Table 1.

Masato Mori (*), president & CEO of Nippon Steel USA, devoted his entire presentation to an assessment and forecast of steel consumption, capacity and output in China. Like most outside observers, he relied entirely on Chinese data and estimates which, in this writer's view, are overstated. That problem aside, Chinese sources anticipate a great deal of excess capacity to arise in the near future when briskly expanding capacity, stoked by intense investment activity, would face decelerating demand. How much of that excess will materialise is far from certain. Not only is the Chinese infrastructure, including ports and roads, becoming too overloaded to sustain the current rate of industrial expansion but also a considerable portion of total investments will have to be channeled into refurbishing or displacing obsolete, poorly situated steel plants. Many of those plants have only been kept afloat by abnormally high steel prices and local subsidies. Depending on the source used, Mr Mori reported estimates prepared by the China Iron & Steel Association predicting consumption in 2005 to be between 240-250Mt but capacity to have reached 366Mt. By 2010, the respective figures grow to 280-340Mt consumption and capacity at 445Mt. Currently, 68% of imported steel is flat products (Fig 2).

The managing director of Eurofer, Dietrich von Hulsen (*), expressed cautious optimism about the EU steel market's performance this year. The main impulse would come from rising domestic sales, because European exports of steel and steel-containing equipment were negatively affected by the strong Euro. According to Mr von Hulsen, the EU enlargement on 1 May this year added a mere 5% to GDP but an impressive 13% to crude steel output and 12% to steel consumption. The steel trade surplus maintained by producers in the new member countries with the EU (15) would decline unless those producers "improve quality and service to meet ever more demanding local customers requirements".

The eastward push of EU boundaries is likely to entail a number of complex problems. Among them are potential weakening of the only recently achieved, price discipline in the EU steel market and a need for massive financial assistance for the long-delayed closure of obsolete capacity and mass dismissal of redundant workers in several new EU countries. These problems might not cause much of a stir during relatively good times but conflicts may erupt when markets weaken.

US STEEL MARKET

The second session of the conference was more narrowly focused on conditions in the US steel market. After the Bush 201 safeguard measure was ended in December last year, AIIS members expected a gradual normalisation of North American steel trade, while US steelmakers feared downward pricing pressure from imports. None of this happened. As John Foster (*) of Ferrostaal pointed out, offshore industries no longer merely react to changes occurring in the USA, as was often the case in the past. Instead, transformations on the global scene have exerted a strong influence on the US steel market. For instance, shortages of coke, scrap, pig iron, rebar, wire rod and ocean shipping capacity were triggered by events abroad--mostly runaway industrial growth in China--and US buyers had no choice but to pay outlandishly high prices or do without. Speculation led to further market destabilisation and Mr Foster advised his customers to watch inventories very carefully, as some of the high prices might not last.

Two other steel traders speaking at this session provided additional facts and insights about the US market. James Bouchard, of Esmark & Mars Industries, noted that steel supplies were very tight in the US market and users were 'begging' for steel. Linking these conditions to the high concentration of the US steel industry, where decisions were made by only 3 or 4 sales executives, he predicted that steel prices would not drop significantly until very late this year. He thought US mills should make a greater effort to help their customers, including service centres and converters. In the view of Rick Dougherty of Cargill Ferrous International, as long as the 'fundamentals' of the US steel market were still good, raw material suppliers and steelmakers would concentrate on profitability at the expense of steel consumers. Ocean freight rates would remain on a high plateau.

Market analyst Chuck Bradford (*) gave a detailed forecast of key steel market numbers. Shipments by US steelmakers would rise to 109Mst this year (up from 105.6Mst last year) and apparent supply to 118.1Mst (114.5), while imports would drop to 22Mst (23Mst) and exports to 6.3Mst (8.1Mst). Because consumption is expected to remain virtually unchanged at about 117Mst and net trade (imports minus exports) at about 9Mst, almost the entire increase in domestic shipments would be attributable to a moderate recovery of customer steel stocks, following a sharp drop registered last year. Mr Bradford pointed out that US steelmakers have boosted their profitability by raising prices even faster than the explosive increase in material costs. The consequence might be a surge in bankruptcies among automotive suppliers and construction companies bound by fixed-price contracts. He predicted an imminent softening of scrap prices (which has already been proven correct) and his graph of real scrap prices showed that despite the current rise, prices were still well below past peaks in 1975 and 1956 (Fig 3). He also expressed doubts that China could meet its 260Mt production target for 2004 and repeated his view that the widely lamented 200-300Mt of global excess capacity never existed.

[FIGURE 3 OMITTED]

TRADE ROUNDS

The third session was to provide an update on three topics: the OECD negotiations (on the removal of subsidies to steelmakers), the Doha Round of the WTO and the Free Trade Area of the Americas (FTAA).

Gary Horlick, international trade lawyer and AIIS general counsel, referred to the parallels existing between the ongoing OECD negotiations, which enjoy widespread support and the 1991-92 attempt to reach a Multilateral Steel Agreement, which was essentially wrecked by the big US mills' refusal to hold consultations before filing major antidumping petitions. The US mills, Mr Horlick explained, only hurt their own interests with this obstructionism, because in 1998 such multilateral consultations might have nipped in the bud a devastating surge of imports into the US market. He thought the WTO was preoccupied with trade distortions caused by farm subsidies (those of the EU in particular) but that the outdated US antidumping law was also an important issue for many countries. Moreover, he held out little hope for trade liberalisation if the stalled FTAA negotiations were to resume. Deep divisions persisted on agricultural issues and trade laws, especially between the US and Brazil.

Two speakers were highly critical of US trade policies. Dan Ikenson of Cato, a Washington 'think tank', complained that besides fostering a bias against free trade and yielding to the demands of powerful textile, sugar and agrobusiness lobbies, the US government had adopted policies stigmatising imports and demonstrating a contempt for international trade rules. Charles Blum, of International Advisory Services Group, saw few positive results coming out of the various trade negotiations, mainly because the bipartisan free-trade coalition in the US Congress had broken down. Besides, repeated disregard for international law was eroding the traditional US leadership role in global trade negotiations.

The last speaker in this session was Joseph Spetrini (*), who, for many years, headed the Antidumping/Countervailing Duty section of the US Department of Commerce. More recently, he was in charge of OECD negotiations targeting steel industry subsidies. He pointed out that an OECD agreement stipulating a steel-specific prohibition of subsidies (other than for plant closures) would still have to be sanctioned by the WTO. What was holding up an agreement, according to Mr Spetrini, was the European producers' insistence on certain EU-approved exemptions related to investments in R&D and the environment. He urged that time for an OECD subsidy agreement was limited, because the WTO rules committee had already begun its meetings.

CUSTOMS ISSUES

The next session dealt with customs issues and steel import licensing. In March of last year, when the US Customs Service became part of the Department of Homeland Security, its name was changed to 'US Customs and Border Protection'. Because auditing all import shipments is an impossible task, the agency requested that importers and shipping companies become 'compliance partners' by undergoing a rigorous self-assessment procedure. Although this burdened the companies with considerable extra work, it made them subsequently less subject to audits and cargo examinations. Companies that chose not to co-operate with the agency would automatically receive the label of high-risk importers. The scope and procedures of this 'partnering' system were ably explained by one of the customs lawyers, Larry Hanson and government legal expert Kelly Parkhill, as well as by moderator Steven Baker, chair of the AIIS customs committee. In the remaining time, K Parkhill (*) of Customs and Border Protection, discussed the steel licensing system--a holdover of the now defunct 201 safeguard measure--which is scheduled to remain in place until May next year and which steel industry lobbyists would like to have extended to non-201 steel products as well.

FUTURES TRADING

The entire final session was allotted to Neil Banks (*), director of operations at the London Metal Exchange (LME), who for some time has been trying to make steel one of the metals traded at the Exchange. Because price movements of related products usually move closely together, only one of them would need to be traded at the LME. If, as proposed, hot rolled coils of the type SAE 1008/1010, EN DD 11 were to become the benchmark product in the NAFTA and European markets, it could be expected that price fluctuations of HR coils and non-LME products like CR and HD coils would be closely synchronised. Mr Banks explained that in nearly all cases futures prices would tend to converge with actual market prices. In the rare instances where these prices diverge, LME brokers would, by the end of the contract, have to take delivery of the hedged product.

It seems that LME steel trading would, initially at least, be confined to the internal commerce of regions like the EU and NAFTA and exclude truly international trade, the core activity of most delegates at this conference. One may also wonder about the benefits the LME has to offer in markets, where price changes are performed in a highly parallel manner by a very small group of dominant steelmakers. There is far more price competition in the global market. However, if the LME were to step into international steel trade, its brokers would have to negotiate a minefield of penalty tariffs and other forms of trade protectionism.

Thomas Danjezek, president of the Steel Manufacturers Association (SMA), was the after-dinner (and post 'happy hour') speaker. Although his opinions are usually in opposition to those of AIIS, he avoided controversy and occasionally even managed to introduce a touch of humour. Among the issues Mr Danjczek discussed were Chinese 'currency manipulation', ruts in the OECD negotiations, US restraints on imports from Russia, the scope of future import monitoring, pessimistic predictions by steel industry analysts regarding minimill competitiveness, likely increases in the frequency and amplitude of future steel demand cycles, an alleged need for restricting US scrap exports and the tendency of US bankruptcy law to keep inefficient producers in the market. In a brief Q&A session, he conceded that the supposedly undervalued yuan had not kept US minimills from shipping significant quantities of steel to China last year.

Table 1 USA steel consumption/shipments (million short tons)

                           2002    2003 (e)   2004 (e)

US industry shipments      100.0     106.2      110.0
total imports               32.7      23.6       25.5
less imports of semis        8.8       4.9        5.0
less exports                 6.0       7.9        8.5
apparent consumption       117.9     117.0      122.0
less inventory build         0.0       0.5        1.5
actual steel consumption   117.9     116.5      120.5

Source Kirsis World Steel Dynamics

2 Imported steel products to China in 2003

Semi-finished    13.8%
Shapes            2.5%
Bars              1.0%
Wire rod          1.6%
Plates            6.8%
Hot-rolled       19.5%
Cold-rolled      23.7%
Tinplate & TFS    1.5%
Galvanised       12.6%
Electrical        3.7%
Other coated      3.8%
Welded pipe       1.5%
Seamless pipe     1.1%

Note: Table made from pie chart.

Source: M Mori: Ed Note Total imports of
finished steel were close to 43Mt in 2003

ON THE WEB The presentations of speakers marked (*) can be found on the AIIS website www.aiis.org

DR HANS MUELLER TN Consulting 614 May Lane, Mifresboro, TN 37130, USA tnconsultg@comcast.net