Betting Worst Is Over, Steelmakers Spending Again After Cuts

  • Excluding China, demand rising and companies have reduced debt
  • Mills undergoing ‘cautiously optimistic mood change,’ ABN says

After years of losses, plant closings and job cuts, some of the world’s biggest steelmakers are ready to spend more on their businesses.

Combined capital expenditure planned this year by top producer ArcelorMittal, South Korea’s Posco and Russia’s Novolipetsk Steel PJSC will be up 29 percent to $6.7 billion in 2017, the first increase since 2014, according to estimates by the companies. Increases also are planned by some American and European companies, including U.S. Steel Corp. and Thyssenkrupp AG. Investments will mostly be targeted at expansions in key markets and new technologies.

Industry executives are getting more confident after they cut costs and shed debt, just as prices and demand began to recover. While there’s still a surplus, companies are betting business may gradually improve. China has pledged to close some of the unprofitable mills that compounded the glut in recent years, and lawmakers in the U.S. and Europe are restricting cheap imports, which will improve prospects for domestic producers.

“There is a general feeling among the companies that the worst is behind, that higher prices and profitability are not just a blip,” Sergey Donskoy, a London-based analyst at Societe Generale SA, said by email.

Luxembourg-based ArcelorMittal is coming off of its biggest annual earnings increase in seven years, giving it flexibility to boost spending from the lowest level since the company’s formation in a 2006 merger. It’s part of a dramatic turnaround at the company, which scrapped its dividend in 2015 and has a junk credit rating.

Spending this year will jump to $2.9 billion from $2.4 billion in 2016, the company said. Some of that is investments in developing super-strong steel and advanced coating technology. ArcelorMittal, which supplied steel for New York’s One World Trade Center, generates about half its revenue in Europe and a quarter in North America.

Last month, Posco reported its best quarterly operating profit in almost five years after cutting costs, restructuring money-losing non-core assets and improving its product mix. The company says it will expand capital spending to 3.5 trillion won ($3.1 billion) this year from 2.5 trillion won in 2016, adding money to non-steel businesses such as clean-energy, which can offset steel when market conditions weaken.

Lipetsk, Russia-based Novolipetsk Steel, known as NLMK, said last month it will boost capital spending to $700 million this year from $559 million in 2016, the most in four years.

Stronger Demand

The outlook for steel has improved in recent months. Excluding China, the world’s top producer and user, global demand probably will rise 2.4 percent this year, compared with a 0.7 percent increase in 2016, according to the World Steel Association. There will be gains in big markets like the U.S. and Europe, with bigger rebounds expected in key growth markets such as Brazil and Russia, after multiyear contractions, the industry group predicted.

The U.S. price of hot-rolled coil, a benchmark product, is near the highest in more than two years after rallying 62 percent in 2016. In Europe, prices jumped 82 percent last year.

However, demand is expected to decline in China, and the world is still producing more steel than it needs. There’s an estimated capacity surplus of more than 700 million metric tons globally, with about half of that in China, according to the World Steel Association. Even with increased demand in some areas, it’s growing from a low level and Europe is using less steel than it did before the financial crisis.

Bumpy Recovery

That means the recovery could be bumpy. The price of iron ore, the main raw material for making steel, is dropping again. After touching a two year-high in February, iron ore delivered to China has dropped 30 percent, according to Metal Bulletin.

Prices of steel in China are also sliding, falling 15 percent from a three-year high in February. That’s usually a bearish sign for the global market because it raises the threat of exports from the world’s top producer. Hot-rolled coil added 1.2 percent on the Shanghai Futures Exchange on Tuesday, paring its decline this month to 5.5 percent.

Read more: China’s steel industry is poised for a painful contraction

Outside of China, conditions are better. NLMK, Russia’s top producer, is looking at buying foreign rolling plants to take advantage of growing markets. Russian steelmakers will also benefit from a recovering domestic market, which is expected to expand 1 percent in 2017, the first increase in three years, according to NLMK.

Mood Change

Steelmakers are undergoing a “cautiously optimistic mood change,” said Philip Ngotho, an analyst at ABN Amro Bank. “The demand outlook for the western economies is developing well and for the first time in a number of years most of them are growing.”

Steelmakers will probably be wary of investing in high-profile, big-ticket projects as they continue to gauge the strength of the recovery, said Donskoy of Societe Generale.

“We’re expecting slow but positive growth for the next decade,” said Edwin Basson, director general of the Brussels-based World Steel Association, which represents more than 150 producers. “There is a little bit more profit available in the system and therefore the industry can utilize a little bit more investment.”

— With assistance by Martin Ritchie

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