July 2010- Despite the words "emerging" and "developing" often used to describe Brazil, Russia, India and China, these countries have grown to the point where they are major participants in the global metals market. "Brazil has the best iron ore in the world, and China is the largest steel producer and largest steel consumer in the world," says Nick Sowar, global steel industry leader, Deloitte & Touche LLP, Cincinnati. "How can they be deemed to be developing? How can you be in control of 50 percent of the steel production and consumption and be developing?"

According to 2008 numbers from The World Bank’s World Development Index, China’s population is more than 1.3 billion, and India’s has surpassed 1.1 billion. As these nations continue their rapid industrialization, the need for infrastructure alone will result in massive demand for steel and metal products.

Going forward, "the BRIC economies will continue to be a growth engine for the global economy," says Bob McCutcheon, U.S. metals leader, PricewaterhouseCoopers, Pittsburgh. "The need for continued infrastructure development, combined with the consumption of a population this size, will continue to drive significant demand for steel."

The short-range outlook for 2010 and 2011 from the World Steel Association, Brussels, forecasts apparent steel usage will increase by 10.7 percent in 2010, which, if these projections are met, will exceed pre-crisis levels. The outlook also points out steel demand in 2011 will reach a historic high—a result of emerging economies, particularly China.

"The general picture is an improvement on the forecast we issued in October last year," said Daniel Novegil, chairman of the WSA Economics Committee, in a press release. "The world steel industry now seems firmly set on a path to recovery. The emerging economies, who in total maintained positive growth through the crisis, will continue to show strong growth, driving world steel demand in the future; however, the current recovery in the major developed economies is slower, and the projected steel demand for them in 2011 is well below the 2007 level.

"The recovery is not only earlier but also stronger than expected," Novegil continued. "It was driven in large part by government stimulus packages and recent inventory restocking. The real concern will be how post-crisis macroeconomic policies deal with fiscal balancing and inflationary pressures."

"The health of the global economy is essential for growth and expansion opportunities in developing countries," McCutcheon says. "Although the BRIC countries may be growing at a more rapid pace than the developed world, overall confidence in the prospects for future growth and access to capital are still critical elements for investment that affect all economies in varying degrees."

Tentative footing
These numbers predict the general economic picture will show improvement, but concerns stretch far beyond the continued weakness in the United States, Europe and Japan.

It’s no secret the future of global growth lies in emerging markets: China, India, Russia, Brazil, Mexico, South Korea and Turkey, but there are so many hot-button issues in today’s global steel market--from pricing to protectionism and beyond.

At the top of the list is climate change. Sowar points out the majority of countries not associated with the Kyoto Protocol is where 90 percent of new capacity is being built.

"If you follow what’s happened in the EU with cap and trade, it’s been a disaster," he says. "The cap and trade concept is a nationalistic concept that doesn’t conceive of the planetary issue, so what happens is that the developing countries are watching the western European jobs getting transferred to them."

The road ahead isn’t easy. To maintain stability, companies are focusing on achieving growth targets, finding partners in growing markets and becoming self-sufficient with raw materials.

"The developing BRIC economies each have their own unique business climate," McCutcheon says. "This can create challenges in terms of market entry or consolidation. Mergers and acquisitions activity over the past several years has seen considerable activity in these countries. I continue to believe that we will see further consolidation in the industry as well as upstream and downstream integration. We will continue to see joint venture and minority stakes that will facilitate access to foreign markets and raw materials."

This trend toward more joint ventures and minority stakes is "driven in part by the recent credit crisis, where companies were more risk adverse and not as willing to take more expensive majority stakes," he continues. "It is also driven by the need to access new markets or raw materials where limitations may exist commercially or politically. These limitations are often overcome through partnering."

The hunt for iron ore
Earlier this year, iron ore pricing power shifted in favor of Rio Tinto, Vale and BHP Billiton as a result of negotiations with Chinese and Japanese mills. The 40-year-old benchmark system of annual contracts ended in favor of quarterly contracts linked to the spot market.

"The exorbitant price increases recently announced for iron ore will have a deep impact on steel prices and, as such, on the whole manufacturing and construction value chain and, ultimately, on the European consumer," the European Confederation of Iron and Steel Industries, Brussels, pointed out in its second-quarter 2010 report, "Eurofer Economic and Steel Market Outlook 2010-2011." "This could reduce demand for many price-sensitive products and therefore slow economic recovery or even push economies back into recession."

As a result of these shorter-term pricing strategies, companies including ArcelorMittal, Luxembourg, the world’s largest steelmaker, plan to focus on emerging markets and iron ore self-sufficiency.

Lakshmi Mittal, board chairman and CEO, remarked at the company’s annual general meeting May 11 in Luxembourg that the company is targeting growth in emerging markets, with the main growth projects located in South America, the Middle East and Asia.

Similarly, JFE Steel Corp., Tokyo, the second-largest steelmaker in Japan, pointed out in an April 21 investor presentation that its strong earnings recovery has been a result of quickly responding to recovery in emerging countries, accurately adjusting production to demand and thoroughly reducing costs.

The company expanded its overseas alliances with JSW Steel in India in November 2009, Mycron Steel in Malaysia in February 2010 and Sunsco in Vietnam in February 2010.

In addition, JFE has improved access to raw materials through participation in the Byerwen Coal Project. The company acquired a 20 percent interest in the project, which QCoal Pty. Ltd. is developing.

Consequently, the company noted that its ratio of captive coal resources, the highest among major steelmakers in the world, rose to 15 percent and forecasts the number will reach 30 percent in the future.

Sowar predicts India will continue to be an attractive option for partnerships because of the country’s rich iron ore resources. "Of the big steel producers, China and Japan are lacking in good iron ore. They are dependent upon India, Australia and Brazil. Efficient, state-of-the-art industries in countries like Japan want to have access to the iron ore and the market from a horizontal standpoint in India. They don’t want to deal with the bureaucracy, however, so they need a strategic partner. I think we’re going to keep seeing that in India for three reasons: Companies want raw materials, access to a huge growing market and want to be able to maneuver through the bureaucracy.

"Long-run, India is going to be a great market, but they’re 20 years behind China," he continues. "That’s why companies have no problem working their way through and building a steel mill, but it’s the Wild West in terms of making it happen."

ArcelorMittal, however, recently made a major breakthrough in greenfield development. A June 13 Wall Street Journal report noted that villagers at the site of the company’s proposed $8.8 billion steel plant in New Delhi have shown a willingness to sell land to the company. It’s the culmination of five years of negotiations with local landowners in several parts of the eastern Jharkhand state.

The age of metallics
Companies wondering what lies ahead for newly industrialized nations should look to their already-developed counterparts for a glimpse of the future.

"This is the age of metallics," says Sowar. "Ninety-five percent of the steelmaking production equipment in China is the integrated model. However, in the United States, we are now more electric arc than we are basic oxygen. I think the market in China will evolve similarly, and, as a result, one of the biggest opportunities in the next 10 years will be the growing scrap market that’s going to occur in China. What it will take is a lot more automobiles and washing machines being made in China, bought by a growing middle class, and then scrap will be produced from that. We’re going to watch them go from a basic oxygen integrated approach to a minimill approach."

As these countries grow, there will be a huge need for infrastructure development, which will require long products, Sowar says. However, he points out that there is clearly a demand right now for automotive and appliances. "That’s one group of capacity that is going to shoot up in China--the ability to make quality flat rolled. Those that can do it are going to be very fortunate over the next 15 years." MM