Urbanization, Steel Demand, and Raw Materials

By Mike Elliott
Global Mining & Metals Leader, Ernst & Young

Urbanization and steel intensity go hand in hand. In the preliminary stages of a country’s urbanization, steel intensity increases with the need for new infrastructure for improved connectivity, efficient use of natural resources, and creation of sophisticated transport hubs. Increased population density means taller buildings requiring more high-quality steel. Demand for machinery also increases as more of the population urbanizes to find employment industries that are steel-intensive.

Taller buildings require substantially more steel.

Taller buildings require substantially more steel.

The steel intensity curve explains the long-term drivers for steel use (see Figure 1). The first stage of the curve during an emerging economy’s rapid growth is the most steel intensive, driven largely by high levels of government investment that boost construction and infrastructure demand. In many rapid-growth markets, which are in Stage 1 to the left of the steel intensity curve, steel consumption will continue to be driven by the growth of their construction and infrastructure sector. The steel intensity curve stabilizes or starts to decline at around US$15,000–20,000 GDP per capita as a country becomes more developed and urbanization rates begin to decline (Stages 2 and 3).

FIGURE 1. Steel intensity compared to per capita GDP

FIGURE 1. Steel intensity compared to per capita GDP

Integrated steel-making (i.e., non-recycled steel) is primarily based on iron ore and coking coal (i.e., metallurgical coal). For each tonne of steel that is produced, about 1400 kg of iron ore and 800 kg of coal are required.1 Due to this, the production of steel is the second largest use of coal after power generation. Over 70% of steel produced in 2013 was generated using direct coal input, leading to the use of 1.2 billion tonnes of coal—about 15% of total global consumption.2

Although steel remains a large market for coal and iron ore, the current reality of a slowing global market is reflected in forecasts for minimal demand growth in 2015. It is therefore likely that the raw material markets will remain oversupplied, with pricing flat for at least the next two years (see market projections in Table 1). This prolonged period of low prices is likely to push higher-cost suppliers out of the market.

Elliott_table1

While there are concerns that China—as a key driver for growth in global steel demand—may have reached peak steel demand far earlier than previously forecasted and now has a lower growth outlook for the next two to three years, steel producers and raw material suppliers should not be deterred. Considerable scope remains for growth in global steel demand in the medium to longer term. This will come through urbanization and industrialization in other rapidly growing markets as well as from other downstream sectors. Once these trends gain traction, an uptick in raw material markets is likely.

CHINA’S CHANGING DEMAND

Over the last 10–15 years, urbanization and industrialization in China has been a significant driver of global steel demand. The Chinese government has been investing in infrastructure, which has helped drive economic growth. The steel-intensive nature of infrastructure has driven the creation of vast steel production capacity within China, which in turn has fueled demand for coking coal and iron ore.

Import demand for coking coal in China has been growing rapidly in recent years, at almost 30% in 2012 and 40% in 2013. Similarly, seaborne iron ore demand from China increased by 10% per year in the past three years to reach about 917 Mt in 2014.3 To meet this continued demand, iron ore and coal miners have significantly increased supply capacity.

In 2014, however, this trend in growing demand came to an abrupt halt, with China’s coking coal imports falling by just over 17% and growth in iron ore demand moderating to around 3%.3 This is largely due to significantly lower Chinese steel demand growth in 2014. This, combined with new production coming online, has led to an oversupply in both the coking coal and iron ore markets with an ensuing drop in prices. Some market commentators believe that China may have already reached peak coal with both supply and demand for coal as a whole contracting by about 3% in 2014.4 With such a significant slowdown in demand, there are concerns that China has also reached peak steel sooner than expected.5 Chinese steel demand grew by only 1% in 2014 as compared to 6% in 2013. The World Steel Association revised its forecasts to predict even slower growth in 2015 (see Figure 2).6

FIGURE 2. Outlook for growth in steel usage

FIGURE 2. Outlook for growth in steel usage

Considering the relationship between urbanization and steel, there is actually considerable scope for further steel demand from China. The percentage of China’s urbanized population still lags that of developed nations (see Figure 3).7 China’s current steel per capita consumption also shows upside when compared with peak steel per capita consumption of other markets.6–9

FIGURE 3. The extent of urbanization and peak steel intensity in major steel-producing regions

FIGURE 3. The extent of urbanization and peak steel intensity in major steel-producing regions

EY expects, however, that there may be a period of imbalance and slower steel intensity growth, as China’s policies are likely to focus on human-centered urbanization (i.e., in response to the demands of the people), with new urban planning models centered on technology and sustainability.10 China is also beginning to focus on sustainable growth based on consumer demand (i.e., market forces), rather than centrally planned investment that has relied on the metals and other industries as drivers of economic growth.

From a downstream demand perspective, this means there is likely to be less investment in the property sector, which represents a downside risk for the steel sector and raw material producers. An estimated 30% of Chinese steel production goes into the property market. As floor space sold in the first quarter of 2015 was down 9.2% year-on-year over the same period in 2014 and building starts are down 18%, this is also impacting steel demand.11,12

However, growing consumer demand for manufactured goods and cars shows significant growth potential for steel demand. For example, growth drivers for China’s automotive industry include low vehicle density, rising replacement demand due to increasing affluence, an increase in auto exports, and increasing sales as GDP increases (see Figure 4).

FIGURE 4. Vehicle density by country highlights the growth potential in the automotive sector.

FIGURE 4. Vehicle density by country highlights the growth potential in the automotive sector.

China plans to implement emission standards (China IV) similar to Euro IV standards. Under them, vehicles that fail to meet the standards will be banned from sale. This will drive light-weighting of vehicles, which will drive the production of higher-quality flat steel, such as advanced high-strength steel in China. However, it will also bring the possible threat of substitution with lighter materials, such as aluminum.

INDIA’S URBANIZATION WILL REQUIRE MORE STEEL

Ongoing rapid urbanization in India will drive steel-intensive growth in the country. The Indian government is investing heavily in infrastructure and has laid plans to boost domestic steel capacity to 300 Mt per annum by 2025. Indian steel companies have made investments of US$35.4 billion over the last seven years to increase steel capacity.13 Steel demand in India is also increasing, with estimated growth of 5% to 83 Mt and a further 4.8% to 87 Mt in 2014 and 2015, respectively.

To cater to this wave of increased steel production, the country must focus on augmenting its domestic coking coal sources by making better use of its domestic reserves. By 2025, 63% of the 300-Mt steel capacity in India is expected to be in coal-intensive blast furnaces. To meet steel production targets, 170 Mt of coking coal per year will be required. With limited coking coal resources, India is set to overtake China as the world’s largest overall coal importer in 2015 and 2016.14 Most of this supply will come from Australia, which supplied 85% of coking coal imports to India in 2013.

Unlike coking coal, India has sufficient iron ore reserves to cater to its domestic steel industry. In the past, India has produced around 216 Mt of iron ore per year, far more than its rate of domestic consumption of around 100–105 Mt. In recent years, however, the Indian government imposed bans on iron ore mining to combat illegal mining—this step reduced domestic supply. The government is, however, planning to auction off iron ore assets, which will improve the domestic availability of iron ore. Indian iron ore producers have the required infrastructure and logistics to ramp up production quickly to meet domestic steel sector demand in the next few years.

STEEL DEMAND GROWTH IN OTHER RAPID-GROWTH MARKETS

Increasing urbanization in Turkey and Mexico over the last 30 years has led to high per capita steel consumption in both countries. The urban populations in Turkey and Mexico have increased from 52.4% and 69% in 1985 to almost 73% and 79%, respectively, in 2014. As a result, per capita steel consumption in both Turkey (~450 kg) and Mexico (~225 kg) is higher than many other emerging economies. The two countries already have steel-making facilities; however, over 70% of steel produced in both countries is through electric arc furnaces, which recycle steel and therefore rely heavily on scrap steel and energy, rather than iron ore and coking coal. Thus the reliance of these countries on the seaborne iron ore and coking coal markets will be limited if this trend continues.

Similarly, the growing size of the Indonesian and Nigerian urban populations indicate that the usage of steel could increase in coming years, particularly due to demand from the infrastructure and construction sectors (see Figure 5).15

FIGURE 5. An increasing proportion of the population will be urbanized in Indonesia and Nigeria15

FIGURE 5. An increasing proportion of the population will be urbanized in Indonesia and Nigeria15

Steel consumption has already picked up in Indonesia. Africa as a whole represents a future growth opportunity for the global steel sector, particularly in terms of infrastructure. African and Indonesian steel production is currently relatively small. Indonesia relies on coking coal imports for domestic steel production at present. Africa has only 3.7% of proved global coal reserves, the majority of which are located in South Africa.16 Africa therefore is likely to rely on imports if it builds up a domestic steel industry to support its growing infrastructure needs.

THE FUTURE OF STEEL AND URBANIZATION

With forecasts for increasing urbanization in many parts of the world, industrialization and an increasing need for infrastructure will drive steel-intensive growth for the foreseeable future. In the short term, however, a period of slower steel demand is projected until China’s rate of economic growth recovers and industrialization in other rapid-growth markets gains traction.

As currently 70% of the world’s steel production relies on coking coal and iron ore as raw materials, it is likely that demand for coking coal and iron ore will continue to grow at a steady pace in the medium term. In the longer term, it is possible that increased recycling could displace some of this demand.

DISCLAIMER

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice, and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

REFERENCES

  1. World Steel Association. (2015). Fact sheet: Steel and raw materials, www.worldsteel.org/publications/fact-sheets/content/00/text_files/file0/document/fact_raw%20materials_2014.pdf
  2. World Coal Association. (2015). Coal & steel statistics, www.worldcoal.org/resources/coal-statistics/coal-steel-statistics/
  3. UBS. (2015, January). Global I/O: Miners price review.
  4. Puko, T., & Yap, C.W. (2015, 26 February). Falling Chinese coal consumption and output undermine global market. The Wall Street Journal Online, www.wsj.com/articles/chinas-coal-consumption-and-output-fell-last-year-1424956878
  5. Sanderson, H. (2015, 17 February). Concerns raised as China steel enters ‘peak zone’. Financial Times, www.ft.com/intl/cms/s/0/ea7af92e-b1e9-11e4-8396-00144feab7de.html#axzz3VWovuQhi
  6. World Steel Association. (2014, 10 June). Worldsteel short range outlook 2014–2015, www.worldsteel.org/media-centre/press-releases/2014/worldsteel-Short-Range-Outlook-2014-to-2015.html
  7. The World Bank. (2015). Data: Urban population (% of total), data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS
  8. ArcelorMittal. (2010). The future of our business, corporate.arcelormittal.com/~/media/Files/A/ArcelorMittal/investors/presentations/investor-days/2010/627-48-0-0-InvestorDay2010-Presentation-Lnmup.pdf
  9. Internal EY Analysis
  10. Deutsche Bank. (2014, 18 March). China: Implications of the ‘new-type’ urbanization plan.
  11. Bromby, R. (2014, 2 October). Chinese property’s long commodity shadow. MiningNewsPremium.net, www.miningnewspremium.net/storyview.asp?storyID=826936090&section=Outcrop&sectionsource=s175
  12. National Bureau of Statistics of China. (2015, 15 April). National real estate development and sales in the first three months of 2015, www.stats.gov.cn/english/PressRelease/201504/t20150415_712772.html
  13. Deutsche Bank. (2014, 28 May). A return to materials intensive growth.
  14. Els, F. (2015, 18 February). Coal price rally with legs as India overtakes China, Mining.com, www.mining.com/coal-price-rally-with-legs-as-india-overtakes-china-22896/
  15. United Nations. (2014). World urbanization prospects, 2014 revision, esa.un.org/unpd/wup/Highlights/WUP2014-Highlights.pdf
  16. BP. (2014, June). Statistical review of world energy, www.bp.com/statisticalreview

 

The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.
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