Massive overcapacity in the steel industry
The steel industry is plagued with massive overcapacity—due to a slowdown in major steel-consuming regions. Estimates for steel’s overcapacity vary from 300 to 600 million tonnes. Almost half of the overcapacity is in China.
In mid-2013, Morgan Stanley estimated that steel’s overcapacity was 334 million tonnes. In a recent report, the Boston Consulting Group pegged steel’s overcapacity at 360 million tonnes.
How severe is the overcapacity?
The annual steel consumption is less than 400 million tonnes in the European Union, Japan, India, and the US. After China, these countries are the largest steel-consuming regions in the world. This should help you understand the severity of the situation. The above chart shows the apparent steel consumption in these regions in 2013.
In fact, the massive overcapacity is one of the main reasons behind higher levels of steel exports—especially from China. Chinese steel exports reached record highs in 2014. As a percentage of consumption, steel imports reached historic highs in the US.
This had a negative impact on steel plays—like ArcelorMittal (MT), U.S. Steel Corp. (X), Nucor (NUE), and AK Steel (AKS). Since the SPDR S&P Metals and Mining ETF (XME) invests in these companies, its performance also took a hit in 2014.
With massive steel production capacity coming online, the capacity utilization ratio decreases. When the plants are operating at less than optimum capacity, it has a negative impact on the steel companies’ profitability. Analysts estimate that a capacity utilization ratio below 80% hurts the steel plays’ profitability. A utilization ratio above 85% is a positive sign for the industry.
In the next part of this series, we’ll look at the latest capacity utilization ratio. We’ll also discuss the outlook in 2015.