The Global and Local Stainless Steel Primary Product Market

INTRODUCTION

For the last few years the South African stainless steel industry has been going through an enormously challenging time. The stainless steel industry is highly cyclical in nature with downturns often being self-perpetuating. We have compiled this report to understand the evolution the South African stainless steel industry over the last 50 years and to put its/performance in context within the global industry.

GLOBAL PRODUCTION AND SOUTH AFRICAN CONSUMPTION

World Stainless Steel Production 1950 – 2018

Total world production of stainless steel primary products, according to the International Stainless Steel Forum (ISSF), was 50.7 million tonnes in 2018 as opposed to 48.1 million tonnes in 2017.

From 1950 to 2018 the fitted Compound Annual Growth Rate (CAGR) was 5.67%, whilst from 1980 to 2018 this was 5.56%. During the same period, the ISSF’s figures for lead (2.01%), zinc (2.05%), steel (2.47%), copper (2.64%), and aluminium (3.84%) all show that stainless steel outperformed other metals.

(Unlike the normal CAGR, which calculates the annual rate that would grow the starting value, 1950 production, to the ending value, 2018 production, the fitted CAGR represents the average growth rate returned from an exponential curve fitted to each year’s production tonnage. Unlike normal CAGR, with the fitted CAGR, the value for each year’s production DOES matter, because each value affects the average growth rate that is calculated. This method is used throughout this report.)

The Chinese Share of Global Stainless Steel Production

China became a member of the World Trade Organisation (WTO) on 11 December 2001. Prior to this, China’s share of global stainless steel production was less than 5%. By 2007, Chinese production had risen to more than 25% and plateaued at just more than 50% in 2013.

The fitted CAGR of Chinese production from 1980 to 2001 was 6.8%. After admittance to the WTO, this fitted CAGR has dramatically increased to 20.4% for the period from 2002 to 2018.

The fitted CAGR of global production, excluding China, from 1980 to 2001 was 5.3%. From 2002 to 2018, global production, excluding China, was a paltry 0.18%. This clearly demonstrates that since Chinese admittance to the WTO, almost all global growth has occurred in China.

South African Apparent Consumption versus World Production

South African primary product Apparent Consumption is compared with global Production in the following graph:

Apparent Consumption is local production plus imports less exports. Apparent Consumption thus differs from Real Consumption in that it excludes the effect of destocking or restocking.

The details of this evolution of stainless steel growth will be examined in more detail in the next section. However, this graph clearly shows how growth in South African Apparent Consumption had mirrored global production until the divergence of the two sets of data after 2014 where Apparent Consumption has dropped from around 200 000 tonnes to around 150 000 tonnes since then.

South African Primary Product Apparent Consumption

The details of the make-up of South African Apparent Consumption is shown in the following graph.

FITTED COMPOUND ANNUAL GROWTH RATES

Global Production Fitted CAGR

Globally, the fitted CAGR from 1963 to 2018 was 5.69%. The following graph analyses the CAGR for periods of upturn and downturn within the global stainless steel market

The above graph shows that from 1963 to 1976, the CAGR was 8.9%, spurred by the invention of the AOD and consequent cost reductions in stainless steel stimulating demand.

The oil crisis and global recession until 1983, saw CAGR of -0.2%. 1984 to 2007 saw a remarkable run, with CAGR of 6.8%. This was interrupted by the Global Financial Crisis, resulting in a CAGR of -6.7% for the following two years. From there, growth has recovered to pre-GFC levels and has been at 6.9% for the last nine years.

South African Apparent Consumption Fitted CAGR

The following graph analyses the CAGR for periods of upturn and downturn in the local stainless steel market.

 

1963 to 1974 saw an excellent CAGR of 15.2%. This was dampened somewhat (CAGR 4.3%) due to the oil crisis and global recession. CAGR recovered over the subsequent five year period until 1988, showing a CAGR of 16.4%. The effects of the Rubicon Speech, and the last days of Apartheid saw CAGR slump to -7.5% for the period until 1992, where the promise of democracy and the New South Africa, saw CAGR recover to 19.5% for the next three years.

The last few years of the twentieth century saw the Asian debt crisis and soaring local interest rates, tempering growth somewhat to 2.0%. The first years of the twentieth century saw CAGR recover to 6.9% until the GFC saw that run come to an end with a dramatic downturn and the CAGR slipping to -24.3% for this period. The five years following the GFC saw a good recovery with CAGR averaging 15.5% and helped by the 2010 World Cup. However, since the peak, in 2014, the CAGR for the last four years has been -5.0%.

Historically, South African stainless steel upturns have lasted, on average, 6.4 years (range of 3 to 11 years), whilst downturns have lasted, on average 4.6 years (range of 2 to 9 years). Given that we are in the fifth year of downturn, history would suggest that the next upturn is around the corner.

2019 AND EXPECTATIONS

Apparent Consumption for 2019

The apparent consumption for the first five months of 2019 was 45 921 tonnes. This is 32% down on the same period last year. Based on this figure, the expectation is that apparent consumption for the full year would be about 105 000 tonnes. This 32% contraction would surpass the 27% drop seen in 2015 and would be the worst contraction since 2009 (36%) or 1996 (55%).

In absolute terms, this 105 000 tonnes apparent consumption would be lower than 2009 (89 740 tonnes) and would take us back to levels last seen at the turn of the century.

South African Stainless Steel Industry 3 Months Expectations Index

The Sassda Expectations Index is not very positive either with the index dropping once again below the 50-point mark that separates expansion from contraction.

The Economy moving forward (Bureau for Economic Research)

“Earlier in the year, there was some expectation that the period following the election would bring increased certainty with higher confidence levels. However, domestic confidence and GDP growth continue to be constrained by a number of factors. These include weak demand conditions, a rising fiscal and State Owned Enterprises burden, ANC factional battles, as well as rising global tensions that have worsened the outlook for the world economy.”

The BER forecast, published on 22 July, 2019, for the third quarter of 2019 said “We have again downscaled the outlook for real GDP growth, both in 2019 and 2020. A particular feature of the latest forecast update is a further significant worsening in the country’s fiscal ratios. A main budget deficit of around 6% of GDP is expected for 2019/20. Fiscal risks are on the downside.

“After the release of much weaker-than-expected 2019Q1 GDP figures in early June, we downscaled the 2019 real GDP growth forecast from 1% to 0.7%. Subsequent developments have made us more circumspect about the pace of any growth recovery in the second half of the year. These include the apparent lack of movement on key growth-enhancing policy reforms. As a result, at a projected 0.2%, real GDP growth in 2019 is expected to be barely positive. A mild recovery to 1.1% is pencilled in for 2020.

“The combination of global growth concerns, low domestic growth and subdued inflation forced the SA Reserve Bank’s hand to reduce the policy interest rate by 25bps to 6.5% at its July 2019 policy meeting. This was in line with our expectation. This reduction is expected to be followed by a further 25bps cut at the September meeting. However, this is by no means a certainty and depends on whether any of the key inflation risks materialise.”

CONCLUSIONS

There has been a dramatic, although not unprecedented drop in apparent consumption for the first five months of 2019. Historically, drops of this magnitude have always been followed by a sharp recovery in the next year. Although it would be impossible to speculate on whether this will be the case in 2020, Sassda remains committed to supporting and growing the industry during this challenging time in its history.