Ferrous metals market: prospects of Kazakhstan
Vladimir Terlovoy, Director of research company Metal Expert
Kazakhstan has significant reserves of iron ore, the development of which could allow to produce steel and rolled metal with a lower cost, offer competitive products to the growing domestic market, as well as take advantage of the growing demand for mining-and-metals production complex products from China and Iran, and in the future – Russia.
World market: results and trends
A key driver of the growth for the Kazakhstan ferrous metallurgy is the economy of China, which today has a determining influence on the world market of steel and raw materials for its production. In the last decade, the significance of this factor continues to grow permanently. So, steelmaking in the Celestial Empire increased from 126 million tonnes in 2000 up to 716 million tonnes in 2012. The country's portion of the world production for this period increased from 15% to 47% (chart 1), and in early 2013 for the first time reached 50%.
However, very soon the Chinese market anticipates significant changes that will impact both on the future of the metallurgy itself, and on the production of raw materials for it. No matter how evolves the world market in the coming years, experts agree that China's steel consumption growth will slow down dramatically. To do this, there are substantial prerequisites that are embedded in the structure and dynamics of Chinese metal consumption.We expect the peak of steel consumption in the country has either already been achieved or to be achieved at the soonest possible time, and the growth of demand is expected only in the North-Western provinces of the PRC. De facto metal consumption in China is more like a situation characteristic of developed countries, where the growth of its rate is less than the rate of GDP growth.
Real apparent steel consumption in China increased in 2012 less than for 2%. And although, in absolute terms, this figure is very impressive, it is still an unprecedentedly slow rate – not the ones, which are expected by all market participants.
As a consequence, the arisen excess of capacities in the Chinese ferrous metallurgy will influence both domestic and world markets. In 2012 steelmaking in China increased from 3.1% and amounted to 716.54 million tons (+21.5 million tons). This increase (even without considering a multiple processing) is approximately adequate to the increase for 19 million tons of finished metal production, besides almost half of this volume was supplied to the foreign market.
In early April this year, the Chinese Purchasing Managers' Index (PMI) was published by results of March 2013, which showed a drop for 14 points, reflecting dramatically negative expectations of Chinese consumers.
· the peak of steel consumption in the country had already been achieved in 2012 (or will be achieved in 2013;
· excess of capacities on steelmaking in China is estimated by us at 250–300 million tonnes, and there is a threat to export growth;
There exists a potential of increasing of a crowbar stocking and growth of electric steel portion in common smelting, which will cause lower consumption by Chinese metallurgists of iron ore and coking coal.
Similarly, the situation would be with supply and demand in all segments of the world market of raw materials (in particular – iron ore and coking coal), where the investment activity has been focused in recent years on continuation of high growth rates of demand on the part of China.
An obvious case of changing trends in the procurement of raw materials by Chinese metallurgists is the situation with the iron ore raw materials (IORM). In recent years China pursues the policy of diversification of its sources. As a result, the geography of IORM supplies to the country has undergone noticeable changes. In particular, each year more and more India is losing its grounds on the Chinese market. In 2005–2012 with the increase of the total Chinese imports for 2.7 times, Indian shipments, on the contrary, reduced for more than twice. As a result India here dropped from the second to the fourth place, giving in Australia, Brazil and the Republic of South Africa.
On the whole the change of the portion of major suppliers is not a quick process. But their role in the Chinese imports is declining steadily and is less than 75% (Chart 2). Such countries as Iran, Ukraine, Indonesia, Mauritania and Malaysia, whose supplies have been growing much faster than the overall Chinese imports of IORM, are approaching the leaders. New major suppliers emerged on the market of the Celestial Empire. So, in the last year or two IORM imports from African states increased significantly.
Thus, the situation with the consumption of steel in China is a threat, which cannot be ignored, but at the same time gives certain opportunities to those, who intend to move forward on the PRC market.
Market of Kazakhstan
Speaking of Kazakhstan, in recent years the export of ore from the country grows solely at the cost of supplies to China, which in its turn, brings to a higher proportion of concentrate in shipments (Chart 3 and 4). Supplies to Russia remain relatively stable, but may fall in the near future under the influence of reorientation of IORM export flows of Russian producers to the domestic market. On the whole the potential for a geographic diversification of iron ore export from Kazakhstan is limited. At the same time there is an opportunity to increase its volumes at the expense of metallurgical products of subsequent processing – hot briquetted iron.
Similar trends, in our opinion, are characteristic of the export of Kazakhstan coal, which will be pushed out of European Union markets by other suppliers. With regard to the Russian market, it is most likely that purchases in Kazakhstan can be reduced, because the Russians will reorient on own internal supplies.
At the same time the export of Kazakhstan ferroalloys is steadily growing. Chromiferous alloys, more that 92%, dominate in supplies. It is significant that Kazakhstan has the greatest impact exactly on the market of chromiferous ferroalloys: the portion of the country in world trade last year exceeded one-third of the global volume.
As an illustration of what is happening in the Kazakhstan market of finished metal production, let us consider the market of long products – the most competitive and dynamic among CIS countries (Charts 5 and 6).
Apparent consumption of long products in Kazakhstan is rising for the third year in a row, having increased in 2012 for 18%. However, its volume as before still gives way for one third to a peak pre-crisis level.
Production of finished grade (excluding square billet) last year grew at 3.2 times. The main contribution to this process has been made by ArcelorMittal Temirtau (+118 thous. tons) and Casting (+72 thous. tons). It is noticeable that these figures were ensured almost exclusively by the growth of shipments to the domestic market. As a consequence, for 2012 the import ratio in consumption declined from 91% to 75%.
Other features of the Kazakhstan market of finished metal products can be orientation on export of production of all types of flat products. It should be noted that the portion of supplies abroad in total output is decreasing from year to year: if in 2004 nearly 95% of produced products were exported, then in 2012 – only 77%.
At the same time given in Kazakhstan export oriented production import has a big portion of consumption of steel sheet on the domestic market. In the past four years, its volume is steadily increasing (in 2012 – 46%).
Even more significant is dependence of Kazakhstan on import of long products and steel pipes. The proportion of products, which the Republic buys outside CIS is steadily increasing: in the low-cost market segment there are supplies from China, in more expensive – from developed countries.
It should be noted that the efforts of Kazakhstan to import replacement were not in vain: today the portion of imports in consumption of long products makes up 75%, while back in 2011 this figure exceeded 90%. Potentially the Kazakhstan metallurgy has an opportunity to reduce dependence on imports even more. However the success of investment projects in this sphere will largely depend on the extent to which these projects will be related to plans of other market participants.
In preparing our forecasts we base on mixed methods. The basis of the short-term forecasting (for 2013) are methods of nonlinear dynamics, while medium- and long-term forecast is based on the assessment of the balance of supply and demand of the world market of ore and coking coal, as well as costs of key suppliers.
On charts 7 and 8 are presented expectations of prices of the world market for coal and ore, prepared by the company Metal Expert, compared with consensus-forecast, compiled by using analysts ' forecasts of the world's leading banks.
As it is seen, we are quite optimistic in assessing short-term prospects of change of market prices. However we expect that in the medium term quotes will decrease, which is fair for all kinds of raw materials without exception and finished metal products.
Despite optimistic short-term forecast, it is not possible to exclude that the dynamically changing market of mining-and-metals production complex products can dramatically "sink" already this year. Considerable uncertainty is stipulated by how large influence of China today on the global metallurgical market is. Exactly PRC can become a major destabilizing factor. At the same time the existing in this country state regulation let us hope that the collapse of market prices would be avoided.
Speaking about prospects of Kazakhstan's mining-and-metals production complex in the context of global trends, it should be borne in mind that the majority of implemented investment projects are oriented on a current market condition, import replacement in the segment of products and the use of a crowbar as a raw material.
Kazakhstan has rich natural resources, the exploitation of which could allow to produce steel and rolled metal with a lower cost, offer competitive products to the growing domestic market, as well as take advantage of the growing demand for mining-and-metals production complex products from China and Iran, and in the future – Russia (Siberia and Far East). Right in this way, as we expect, Kazakhstan metallurgy will go.
Summing it all up, the following conclusions can be made.
· In the medium term in all segments of mining-and-metals production complex we forecast surplus of supply.
· Market participants will have to promptly react to changes, relying on reliable marketing data and objectively assessing market prospects.
· The success of the industry will be largely conditioned by the adequacy of estimates of world market development and strategy of the most rational use of the existing raw materials potential in Kazakhstan.
· The growing domestic market may provide additional opportunities for the development of production, oriented on import replacement.
· A strategic course for Kazakhstan's mining-and-metals production complex is development of a mining base and production of first processing products using modern technologies.
· Having created a foundation for steel output with a low cost, the industry would be able to compete successfully and develop stably.
· Today the determining competitive advantage is low total cost of products (including delivery to the consumer). Kazakhstan has a huge potential to compete with the most successful players on the market of raw materials and first processing products (both Chinese and Russian). In order to take advantage of this potential, large investments will be required.
· Rational strategy of actions on the global market (especially in a situation, where supply exceeds demand) should be resolved through the joint work of public authorities, industry experts, manufacturers of mining-and-metals production complex products and transport workers. Both the current market situation and medium- and long-term prospects of market development should be taken into account.
Vladimir Terlovoy has a 17-year experience of work in the information-analytical company Metal Expert. He participated in more than 50 large projects as the chief analyst, leading expert-consultant, project manager. Expert on market estimates and forecasting. Specialization: ferrous metals markets and metallurgical raw materials.
Metal Expert renders services on information-analytical support and consulting of participants of the mining and metallurgical market. The company carries out research of markets and strategies, develops investment substantiations. www.metalexpert-group.com