Must-know: Analyzing the way forward for the steel industry

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Jul. 9 2014, Updated 9:04 a.m. ET

Future performance: The key drivers

As per Warren Buffett, “The rear view mirror is always clearer than the windshield.” We’ve seen the historical steel drivers in detail. But in this part of the series, we’ll try to see through the windshield to look out for possible factors that could impact the steel industry in the future.

Construction industry

Globally, this sector consumes the most steel. China leads in this sector. The sector hasn’t been in the best of health. There are images of so-called ghost towns in China, where there are concrete jungles without any residents.

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The chairman of Vanke, China’s largest property developer, noted last year that China was caught in a property bubble. Going forward, the sector isn’t expected to deliver the high growth that markets were used to. But it should revert back to natural rates to provide housing for the growing population.

Millions of people the world over still don’t have access to basic housing. As more people come out of poverty in countries like India, demand for housing is expected to increase.

Transportation

This is the second-biggest steel consumer globally. It’s expected to do well. The per-capita vehicles in developing countries are low but rising. Even the developed world is coming out of a recession.

Shipbuilding is another key steel user. And with rising global trade, it’s expected to do well. The increasing demand from this sector should benefit steel producers worldwide.

South Korea is an example of where steel consumption has been driven by car exports and shipbuilding. Incidentally, it has the highest per-capita steel consumption.

Infrastructure spending: The government supports the steel sector

Governments have a duty to provide infrastructure to support their citizens. Not only does this help in job creation, but it also has a trickle-down effect on an economy. Sectors like steel are among the biggest beneficiaries of this spending.

The chart above shows the planned infrastructure expenditure in various regions. Emerging economies in South America, along with China and India, are expected to spend in a big way on infrastructure creation. As the Chinese economy has slowed, the government is providing stimulus in terms of increased spending. China recently increased its expected investment in railways to around $130 billion—up from the around $100 billion planned originally. China also plans to connect 90% of villages by 2015.

Other emerging countries, like India, also are planning to develop infrastructure like railways, bridges, and expressways. These projects use a lot of steel and are expected to drive the steel industry in the future.

Raw material prices

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As you saw earlier, the steel industry is raw material–intensive. Iron ore and coal prices have been on a downward spiral this year. Iron ore prices have dropped more than 30% this year, while coal has plummeted 15%. There’s no respite for producers of these commodities. Slowing Chinese demand and a fresh iron supply will keep prices low.

Lower raw material prices help companies like Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). ETFs like the SPDR S&P metals and mining index (XME) are also affected.

The steel super cycle: Why there’s a lot more where that came from

Every economy goes through a super-growth stage. In this period, it makes giant leaps toward development.

The above chart shows the cumulative steel consumed by some economies during their periods of high growth. Interestingly, China has consumed the least steel in its growth compared to all other economies. More importantly, there are countries like India that are trying to break away from the shackles of underdevelopment.

As more countries make strides towards development, the steel story, it seems, is far from over.

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