London - 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 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 US 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 US 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 are investments in developing
super-strong steel and advanced coating technology. ArcelorMittal, which
supplied steel for New York’s One World Trade Centre, 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 US and Europe,
with bigger rebounds expected in key growth markets such as Brazil and Russia,
after multiyear contractions, the industry group predicted.
The US 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 rose 1 percent on the Shanghai Futures Exchange, paring its decline this month to 5.7 percent.
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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 utilise a
little bit more investment.”