Demand for steel increased in 2010 as the majority of the industries that use steel showed signs of recovery following the financial crisis. However, there was a degree of excess capacity in the steel industry, which diminished the possibilities to increase prices in pace with the increased demand. At the same time, increased global demand for iron ore and coal, primarily driven by high Chinese steel production, resulted in steep increases in raw materials prices in 2010. The combination of excess capacity, pressure on steel prices and increased raw materials costs led to squeezed margins for the steel industry as a whole.
Unexpected rapid recovery led by developing countries
Following a sharp downturn in the global economy, the second half of 2009 saw an upturn of the economy and, in the first half of 2010, the recovery – led by developing countries – was more rapid than expected. At the beginning of 2010, the recovery was reinforced by the customers’ need to restock their very low inventory levels, and also by the fact that the emerging economies were not affected as much during the period of recession. China, Latin America and other emerging regions continued to grow at almost the same rate as previously, while growth in the more mature industrialized countries was significantly lower during the year. Assisted by powerful stimulant measures, the US showed a somewhat stronger recovery than Europe.
According to the World Steel Association, steel production in 2010 was 15 percent higher than the 2009 level. Expressed in absolute terms, the levels in the industrialized countries were still significantly below the pre-crisis levels. Notwithstanding a degree of slowdown, China recorded a new record level corresponding to 44 percent of global steel production.
New pricing model for iron ore and coal
2010 saw a move away from the previous annual iron ore agreements which were based on a global benchmark price system. Historically, annual agreements have been established between the major raw materials suppliers and some of the largest Asian steel producers. Other parties have then adapted themselves to these agreements. Starting in 2010, there are instead largely quarterly price agreements based on prevailing spot prices. In Sweden, LKAB was one of the few international mining companies to retain its annual benchmark prices in 2010.
As regards coking coal, the American suppliers retained the annual pricing model in 2010, while others – with BHP Billiton in the lead – changed to quarterly prices. Both iron ore and coal prices increased sharply in 2010 and approached the previous peak levels from the end of 2008.
Increased business activities
Business activities in SSAB’s most important customer segments continued to improve in 2010 and demand for niche products gradually increased. Demand was strongest from the mining industry, and also from the energy sector. Construction machinery and heavy transport vehicles also recovered, albeit from low levels.
Thanks to the increased demand in the consumption stage together with the need to restock inventories to more normal levels, steel prices increased in the first half of 2010. Price levels stabilized during the second half of the year and declined somewhat towards the end of the year, due to the end of the inventory buildup period and the fact that previously idled production capacity in the steel industry was once again brought into use. Another contributing factor was a degree of slowdown within the automotive industry resulting from the end of scrappage premium programs.
Recovery continues, however some uncertainty remains
Despite a unanimous sense that the economy is in a recovery phase, customers continue to display a degree of caution, particularly in Europe, and are exercising restraint as regards inventory buildup. A more positive trend is discernable in the US. The trend in the emerging economies continues to be more positive.