WHAT IS HAPPENING TO STEEL PRICES?
Iron and steel industry is one of the main drivers in the overall industry, and has showed rapid growth since early 2000’s until recently. Although the decrease in demand for steel, mainly due to China’s slowdown, caused a negative impact on the industry in recent years; with the help of global economic improvements and China’s increasing domestic demand for steel in 2017, the industry started to recover. These advancements have both positive and negative impacts on Turkish economy. While steel producers are happy with increased demand and rising prices, increase in the price of structural iron nearly stopped Turkey’s construction sector. Construction firms believe that by taking measures to make import of structural iron easier, the negative impacts can be reduced.
Iron and Steel in Recent Past
China, largest steel producer in the World, has %50,4 share in total steel production and is the global leader. Especially with the China slowdown since 2011, the total consumption of steel has stayed still. China is also global leader in iron ore import with 67% share in total import. Iron ore prices recently decreased due to lack of demand from China. Although China’s growth rate decreased, the production capacity stayed the same. This led to increase in inventories, and Chinese steel producers started to export steel. Due to competition, and decrease in the cost of raw material, which has the largest share in total cost, steel prices decreased between 2011 and 2016.
China Effect on Structural Iron Prices
There is an overall increase in steel prices in 2017. China’s concentrate on infrastructure investments in 2017, led construction sector to gain momentum, thus the demand for steel, mainly structural iron, increased. China using produced goods in domestic market and not exporting them, as well as overall rise in global demand for steel increased the prices. China uses mostly iron ore to produce steel. China’s demand for iron ore also increased the iron ore prices in 2017 which increased the cost of production
Iron and Steel Trade in Turkey
Turkey is the number 8th country in steel production as of 2016. Turkey also is the number 8th country in steel import with 17 million tons, and number 10 country in export with 15,3 million tons. Turkey mainly uses scrap metal as raw material for steel production. Despite the increase in the price of iron ore, scrap metal prices stayed almost the same which gave Turkey competition advantage. On the other hand, Turkey mostly imports the raw material. USA, UK, Russia and Ukraine are among the main countries from which Turkey imports scrap metal. These countries’ decisions to protect local steel producers, restricting scrap metal exports, had a negative effect on Turkey. For instance, Ukraine has raised the tax on exportation of scrap metal from 10 euros/ton to 30 euros/ton. Some of Turkey’s main exporting countries, countries in MENA region and USA, put extra tax for imported steel from Turkey. These measures taken by other countries to protect domestic producers had a negative influence on Turkish iron and steel industry.
Change in Currency Rates Affects the Industry
TL’s devaluation against USD in 2016 and early 2017, as well as increase in steel prices, increased the profit margin of Turkish steel producers. During 2017, devaluation of USD against TL decreased the cost of scrap metal. Decrease in currency rate, 3,85 TL/USD in January and 3,40 TL/USD in September, decreased the cost of raw material, which has the largest share in total cost of production. In the following periods, TL is expected to devaluate against Dollar and costs are expected to increase.
Tax Reduction in Imported Structural Iron
Construction sector, which has %67 share in total steel consumption, suffered greatly from the increase in steel prices. Structural iron has 44% share in total steel consumption, thus construction sector was affected the most from price increase. Sector representatives’ demand for decrease in tariff was heard and as of July 28, 2017 tariff rate for imported structural iron decreased from %30 to %10. Even though tax relief helped construction sector, Fuat Tosyalı, chairman of Turkish Steel Producers Association, claims that domestic production level is enough to meet the demand and decrease in tariff would hurt the domestic steel producers. He states that instead of decrease in tariff, another tax relief, decrease in value added tax rate, would be beneficial for both construction sector and steel producers.
What to Expect in the 4th Quarter
Expectation of China’s reduction in steel producing during winter, and data from August indicating that economy of China will slow down, caused iron ore prices to decrease in September. Iron ore price reached over 75 USD/ton in August, while as of September 27, 2017 it is around 62 USD/ton. In the 4th quarter, it is expected to decrease even further to an average of 55 USD/ton. This mean that in the short term we might see a decrease in structural iron price.
Decrease in Capacity, Increase in Price
Due to air pollution and decrease in growth rate, Chinese government decided to cut down the production of steel in the following years. The aim is that the production capacity should be 1 billion tons in 2020 (it is 1,2 billion tons as of 2017), therefore steel prices expected to be more stabilize. The decrease in steel production is expected to have positive effects on Turkey. Steel export of China and competition is expected to decrease, and Turkey is expected to have a larger share in export. Though, decrease in demand for iron ore will cause raw material prices to go down, this does not necessarily mean the price of steel decrease as well. Global economic progress, and global decrease in steel production might cause prices to increase.