by James May on OCTOBER 12, 2015
We are at the point in the commodities and steel price cycle where many long-product mills are losing money.
In China, domestic rebar is selling for $255 a metric ton ex-works. Meanwhile basic raw material costs of iron ore fines and coking coal cost around $170-175 metric ton delivered to Chinese mills.
Domestic Chinese Rebar Price Premium Over Raw Material Costs ($/Metric Ton)
Source: Steel-Insight
That math is simply not sustainable. Mills are losing up to $50 a metric ton. They are financing this from good profits made earlier in the year and from existing lines of credit. However, to keep going (and lose more money) they need more credit.
In Turkey, the spread between scrap and rebar is around $160 per metric ton. Thanks to the devaluation of the Turkish lira, big mills may be covering costs, but smaller or less-efficient mills are bleeding money. Many are up for sale, but we don’t see any buyers.
Survival of the Fittest
In Europe, mills have no pricing power and scrap-rebar spreads are dropping to less than $200 a metric ton with some mills in southern Europe getting even less than that. Once again, only the most efficient can break even on that. Instead, they are buying Chinese billet and hoping to make a few bucks to tide them over. Not a long-term strategy.
Even in the US, price competition among southeast mills is driving down profitability to the extent that restructuring may be needed for older mills with high labor costs, high power costs, low utilization rates and inefficient operations.
Closures have already taken place. Stefana closed in Italy, ArcelorMittal Georgetown in the USA, Haixin Steel in China – but they are minimal in the context of overall capacity. Moreover, despite the fact that these were high-cost producers, it is not unthinkable that there will be efforts to revive them.
No One Wants to Be the First to Go
The benefits of bankruptcy are felt by competitors that can take market share, while the incentives to remain in production range from jobs to bankers hoping that they don’t have to recognize losses. That is what makes downturns in the steel industry last for such a long time.
Hopes that an improvement in demand will lift all boats seem misplaced. Adding to debt right now may only result in a bigger bust later. The tide is going out and some people have been swimming naked.
