Major steel producer Nippon Steel & Sumitomo Metal Corp (NSSMC) expects demand and profit margins for steel to remain high in Japan for the next three years, a senior official has told Metal Bulletin.
The forecast is based on tight market fundamentals and healthy demand from downstream industries, as well as indirect demand for infrastructure projects associated with the Tokyo Olympic Games in 2020.
“Demand for steel will remain high,” Seiji Umemura said. “The tight demand and supply balance will continue in 2018 because macroeconomic growth is continuing at a moderate pace. The market will keep to current prices this year [and we will see] a healthy cost-profit balance.”
Umemura is NSSMC’s director, general administration and marketing, Southeast Asia and India.
The Organization for Economic Cooperation & Development (OECD) said in a forecast last year that growth in Japan is expected to remain at 1% in 2018 and 2019, with the Bank of Japan expected to maintain an expansionary monetary policy and to continue with structural reforms that support the country’s economy.
“Such forecasts are supported by the Japanese government’s outlook on the domestic economy in 2018, which sees private-sector consumption and investment driving the growth rate for [gross domestic product] up to 1.4%,” Umemura said.
Automotive, construction drove market in 2017
Steel demand in Japan was strong in 2017 due to steady growth in the Japanese and global economies. This was especially so for the automotive and construction sectors.
“Domestic automotive production will reach 9.7 million vehicles in the financial year ending in March 2018, up by 3.6% from the last financial year, while the… production [of complete but unassembled sets of parts] will hit nearly 12 million units, up by 1.5% from the previous year,” Umemura said.
“This is being driven by the strong demand for cars in the United States, China and other emerging markets,” he added, pointing out the factors behind the tight demand-supply balance for flat and special steel products, especially those used in the automotive sector.
In the construction sector, NSSMC said that construction start-ups in non-residential building and publicly funded infrastructure projects will increase by 4.6% and 1.9% respectively in the current financial year. This increase in demand includes the effect of the 2020 Olympic Games.
Olympics effect on steel demand to last beyond 2020
The Japan Iron & Steel Foundation (JISF) forecasts that as much as 3 million tonnes of steel demand will arise because of the 2020 Olympic Games.
NSSMC concurs, but notes that most of the demand will be indirectly linked to the Games, in the form of infrastructure development in the Tokyo Metropolitan Area.
“Steel demand directly related to the Olympic Games, such as the steel used for building stadiums and facilities, will account only for 10-15% of the increased demand,” Umemura said. “Most of the steel will be used for urban redevelopment in the Tokyo Metropolitan Area, such as improving transport infrastructure and increasing accommodation for tourists.”
This redevelopment will be undertaken gradually and will continue even after the Olympic Games are over, because there is a lack of manpower in Japan caused by the country’s ageing population, according to NSSMC. This will keep the Japan steel market in a state of tight demand and supply for the next three years.
Healthy market to continue
China has done exceedingly well in tackling steel overcapacity in its domestic markets and is expected to continue this in the near term, especially after keeping its promise to crack down on illegal induction furnaces and to limit the creation of new capacity, the Japanese company believes.
“All in all, we expect that China’s action on overcapacity will support favorable steel markets both in the short run and in the long run,” Umemura said.
“By removing illegal steelmaking capacities and taking steps to [eliminate] 50 million tonnes per year of production capacity by July 2017, [China] cut 170 million tpy of steelmaking capacity in 2017. This [would have been equivalent to] more than 10% of global steel demand in 2016,” he added.
China’s willingness to be proactive as a steering group member of the global forum on steel overcapacity has also helped to increase transparency because it has openly shared its steel production capacity with other member countries.
Rises in raw material prices
The price rises seen in raw materials such as iron ore, coking coal, zinc and ferrous scrap will also support current market pricing in the short term.
“For example, the price of coking coal has soared by around 80% from the end of June 2017 because of operational and logistical issues at Australian mines,” Umemura said.
“Since the cyclone season in the Southern Hemisphere is approaching, [prices in] the coking coal market will remain high and volatile in the next few months,” he added.
“With this uncertainty in raw materials,” Umemura concluded, “steel mills will not cut prices [willingly, because they want to maintain] their profit margins, especially under the expected favorable macroeconomic conditions.”