The October 2017 SRO, while painting a generally improved picture over the previous one, is no big surprise; global steel recovery has picked up further and there are more visible signs of investment recovery. Still, there are a few things that are worth noting.
Firstly, the 2017 overall growth rate of emerging economies excluding China was revised down compared to the 4.0% forecast in our April 2017 SRO. A number of emerging economies did not perform as well as expected in 2017 due to short term disruptions caused by ongoing reform initiatives or political factors. On the other hand, the growth of developed economies was revised up, with strong fundamentals contributing to a noticeably upbeat performance from the EU, Japan and the US. As such growth rates in the developed world and developing world are therefore not too different from each other.
This is expected to change from 2018 and onwards as developing economies start to benefit from the reform initiatives. Some emerging economies are also likely to benefit from an improved (geo)political environment.
It is encouraging that lately many emerging countries have started to take steps to tackle the long needed reform agenda: Goods and Services Tax (GST) system in India, energy and tax reform in Mexico, exchange rate reforms in Argentina and Egypt and fiscal reforms in GCC countries. We are likely to see improved economic fundamentals in those countries over time.
Secondly, the worldsteel Economics Committee at its most recent meeting in Amsterdam a month ago was in agreement that the current momentum is driven mostly by cyclical rather than structural factors. We do not find the improved growth figures to be sustainable in the long term: China’s continued deceleration, megatrends such as ageing populations, a shift to a circular economy and increasingly stringent environmental regulations continue to weigh against steel demand. The newly emerging growth engines are of a much smaller scale and are growing slower than China did in the last two decades and they may not be enough to counterbalance all these adverse forces.
Finally, the anomaly related to the Chinese growth rate this year. The projected Chinese steel demand for 2017 of 765.7 Mt in the October 2017 SRO will yield a y-o-y growth rate of 12.4 % vis-a-vis the 2016 steel use of 681.0 Mt. In 2017 China closed most of its illegal induction furnace capacity, which up until now had not been included in official statistics. With this closure, the demand satisfied from these producers is now being met by the official sector. This shift of demand explains the forecasted jump in the Chinese growth rate in 2017 – the technical effect of the underestimated 2016 base.
To understand the real picture excluding the statistical effect, we should examine the steel using sectors dynamics and our analysis of the steel using sectors point to 3.0% growth of real steel use in 2017. Even this 3.0% growth is higher than our earlier forecast of zero growth in 2017. This upside surprise is due to the quiet stimuli associated with the political cycle (the October leadership election), noted as an upside risk in our April 2017 SRO.
China’s steel using sectors
|Steel weighted industrial production (SWIP)||1.3%||3.0%||0.0%|
The Chinese underreporting issue is not new. In 2013 steel production was adjusted by 43 Mt to correct for underreported tonnages. This was done without revising figures for the previous years, therefore causing the 2013 growth rate to hike to 11.4%.
The lack of consistency in the Chinese steel statistics has been creating difficulties for our forecasts as worldsteel adheres to the principle of respecting official statistics. The good news is that with the closure of illegal producers, most of the problems with Chinese statistics are hopefully behind us.