Two steel analysts are warning the industry to avoid complacency regarding production capacity trends in the US and other potential market imbalances involving China, scrap flows, green steel and coking coal, Kallanish learns from attending the Global Steel Dynamics Forum in New York this week.

Timna Tanners, managing director and senior analyst at Wolfe Research, outlined her “Sheet Storm” overcapacity thesis during the Analyst Perspectives session of the forum. Tanners is well known for her “Steelmageddon” forecasting in recent years, arguing that US coil pricing is destined for weakness because of an abundance of new production.

Tanners now adds the alliterative idiom “Galvanized Galore” regarding the growth in domestic production of coated material. However, she says the steel industry can avoid a “Rebarmageddon” because there are fewer mills and rebar will be in demand.

“We've been building too much sheet capacity in the North American market,” Tanners opined. “I think there's some benign views out there that somehow 7 million tons of excess capacity goes away … That's a tough ask, because certainly, once you build a mill, you usually want to run it. So, we think that that's a lot to absorb in a market that generally doesn't grow that much.”

Compare that with some long products, which are enjoying new demand in the construction of data centers, semiconductor plants and public infrastructure.  

“Rebar is very consolidated. It's an oligopoly,” Tanners asserted. “And you see some great mill discipline there. So, margins are actually quite steady, and they keep prices at a level that doesn't invite imports. In contrast, in the flat roll market, where there's a dozen producers in the North American market and imports, you see, I would say, a surprising lack of discipline. So, they raise prices aggressively when they have a little advantage, and then they have to cut them aggressively when the market sours.” 

Lucas Pipes, managing director at B. Riley Securities, warns steelmakers overseas not to take for granted that the US will always be a guaranteed source of ferrous scrap. With growing demand to feed new electric arc furnaces, scrap is likely to become more expensive, Pipes predicts.

“The supply of scrap historically has been very elastic, and so I think the pricing will come and more scrap will be available,” Pipes said. “But I would say the direction of prices will be higher, and more scrap will stay within North America. So, if you were relying on US supplies elsewhere in the world, I would also think about that.” 

Pipes does agree with market expectations of a long-term, secular surge in steel demand globally.

“There are many regions in the world where per capita use of steel is [performing] remarkably well,” Pipes pointed out. “You look at India, 70 kilograms per person. So, we think there will be a lot of growth over the coming decades. You may see a plateau like you saw during the ‘90s when growth had matured in the US and Europe. But from here on out, we think that total industry will continue to show remarkable growth.”

Tanners and Pipes both say steel customers are not yet proving they will pay a premium for green steel. Pipes said there is “no silver bullet on decarbonisation” and little global unity on a path forward.

“Different regions are at a different stage of development. They have different sets of endowments, national endowments, access to cheap energy,” he noted. “So, I think different regions will pursue decarbonisation differently and I think a key takeaway is that steel markets will be more regional as a consequence.” 

Various North American steel executives at the New York conference called for a border adjustment framework to offset the price advantage of non-green imports. There is reason to believe these efforts could be undermined, Tanners warns.

“If there's a large-enough green premium, what China will do is consume domestically all their dirty steel and then export some of this green steel [and] take advantage of the premium, because their own targets seem to be kind of pushed out. And it could be hard for them to completely abandon the blast furnaces,” Tanners explained. “I can see a scenario where they have green steel to export, ironically. And then that stymies the efforts to block imports by using a carbon border adjustment.”

Both analysts said there is a tendency to overestimate the future consumption of steel in China. For example, Tanners said Chinese government policies ensure demand for new housing will be stifled for another generation or longer.

“If you've got a one-child policy and your parents have a house and your grandparents all have a house, the guy on the bottom is inheriting seven houses. Why would there be any new property built anytime soon going forward in this scenario?” she asked.

“The Chinese government needs to ensure the value of property is elevated, because so much of the stored wealth is in that property. It's not that they need to build new properties,” she added. “That doesn't imply a lot of steel.” 

The supply of scrap generated by China may be disappointing to some, Pipes observed.  

“I think that they will have less scrap than you think. When you look at the rapid industrialisation, it still happened mostly over the past 20 years. And I don't think they're going to grow and push infrastructure, but that's very different from tearing buildings down and converting it into scrap again,” he said. “There will be more scrap as the years go on, but I think it will underwhelm in terms of total scrap supply.”

Pipes is “constructive on coking coal because I think we're seeing that growth in India and Southeast Asia, and I think that will rely on seaborne coking coal.”