Steel and Iron ore Industries Face Tough Road Ahead

A quick recovery for world steel and iron ore producers looks more remote every day the global financial crisis weighs on economic growth, analysts said on Tuesday.

Stuart Reynolds, manager at Global Steel Consultants, presented a bleak revised medium- to long-term outlook for the steel sector on the first day of the three-day America's Iron Ore Conference in Rio de Janeiro.

The conference's proceedings were largely drown out by news across the world earlier in the day that BHP Billiton abandoned its hostile takeover bid of Rio Tinto.

Participants in Rio were widely tight-lipped about the deal as many were restricted legally from making public statements about it. Others were simply reluctant to comment.

"It's a much less rosy picture today than it was just a few months ago," said Reynolds before a room full of steel and iron ore representatives who were still openly confident in demand projections from emerging markets like China.

"As each day passes it appears this slowdown will be longer and deeper in the developed countries of the United States, Europe and Japan and growth will be slower in the emerging world," he said.

The broad study on world steel demand presented by Reynolds suggested the most likely scenario would be for "no growth in steel demand through 2012" and a similar fate is seen for demand of iron ore, the sole purpose for which is steel.

"There is, of course, the chance that the world could snap out of this and we could recover faster than expected but that looks much more remote now," Reynolds said.

The global construction sector consumes over half of all the steel produced in the world, followed by the mechanical engineering sector. Growth in demand for steel from these sectors requires investments, which have become much harder to come by in the current credit climate, Reynolds said.

Equity research analyst Roger Downey at Credit Suisse said that steel output grew by nearly 6% annually from 2001 through 2007 and "I see China steel output growth growing 5.5% through 2012."

But China's expected increase in capacity that is set to come online through 2012 and beyond may not find sufficient demand at home.

While world supply and demand for steel was nearly balanced in 2007 and 2008, Downey's model showed an oversupply growing to 3% in 2009, 7% in 2010 and to 15 percent by 2015.

However, he was more modest in his view that iron ore prices would fall significantly in 2009.

"I think maybe term prices may move $5 per ton up or down in 2009," he said, adding that a lot of marginal, high cost iron ore producers would fold under the current market conditions, limiting production capacity.

But Reynolds was much more pessimistic, suggesting that Japan may have to retire a third of its steel-making capacity over the next five to ten years as prices fall to $600 a ton for hot rolled coil and rebar and less competitive mills get squeezed out of the market.

"China is still a big unknown for us," said Reynolds. "You could see that something was going to break when they announced budgetary investments of roughly half of their GDP. That is unsustainable. No country in history has done that."

Reynolds expects China, where the world has been exporting much of its excess steel, to become a net exporter over the coming years.

"Chinese demand for steel will probably grow but not so much that it will keep China from exporting steel because of the new capacity it will be pushing through by 2012. And that is what will hurt Japanese mills," he added.

"And iron ore prices look like they won't recover until after 2012," he added.

By Reese Ewing, Reuters.