LONG STEEL PRODUCTS. One Year Forecast February, 2016

Transcription

1 LONG STEEL PRODUCTS One Year Forecast February, 2016 Released February 5, 2016

2 contents Introduction 2015 Review & 2016 Outlook 1 Economic Briefing 2-3 Raw Material Briefing 4 Crude Steel Briefing 5 North America 6-11 Europe Asia Emerging Economies disclaimer Whilst every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell steel, related products, commodities, securities or related financial instruments. The the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude: All conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. Any liability for any direct, indirect or consequential loss or damage incurred by any person or organisation reading or relying on this document including (without limitation) loss of income or revenue, loss of business, loss of profits or contracts, loss of anticipated savings, loss of goodwill and whether caused by tort (including negligence), breach of contract or otherwise, even if foreseeable. By continuing to read this document, you agree to all the above terms and conditions in their entirety. Steel-Insight subscription rates are charged on a strict per individual user basis. Unauthorised redistribution of the information including; printing, scanning and forwarding the file, or saving the file to a server all constitute as a violation of copyright law. Should other employees at your company require additional copies of this report please contact sales@steel-insight.com or call us at We will be able to provide your company with a custom-tailored solution to meet your needs and ensure that key corporate personnel have access to this critical market information. Steel-Insight offers substantial savings for corporate subscriptions compared to individual subscription rates.

3 Chinese demand fell 5% in 2015 Chinese long product demand fell 5% in The decline in output was around 4% as exports rose. Our outlook for next year is a modest slowing of the fall in demand. We are forecasting a decline of 3-4%. However, we believe that exports will fall and output will consequently drop to a greater extent. Our upside and downside scenarios are largely based on a better or worse performance than forecast. China accounts for almost 60% of global long steel supply and demand and consequently the rest of the world sinks or swims with it. In that base case scenario, there is little hope for a price rebound in global long products. Chinese mills will remain locked in an existential fight for survival and pricing will remain below average costs for the rest of the year and exports will be priced similarly. Unless a market is protected (and an increasing number of markets are), they will be exposed either directly or indirectly to this fight for survival. CISA mills lost $4.4bn in the first nine months of They lost a further $5.4bn in the final quarter of the year. The painful math suggests that losses were therefore almost $2bn per month. Moreover, these are CISA mills the better-capitalised, higher value-added mills. Private sector mills outside of CISA were probably even less profitable. More than half of CISA mills lost money over the year as a whole the vast bulk were losing money in the final quarter of the year. Losses on that scale cannot be absorbed indefinitely even by an elastic banking structure with vested interests in not crystallising debts. Chinese mills saw some easing of losses this month on the back of higher prices while devaluation also reduced some input costs and made exports somewhat less unprofitable. Yet as we suggested in our mid-month analysis, our concern remains that viable pricing will simply bring back excess supply and prices will fall again after Chinese New Year. This will curtail the very modest rally that will peter out by the end of Q1 with further weakness at that point, unless supply is cut and doesn t return. While at least the government is recognising zombie steel companies that are kept alive with regular infusions of credit, they appear incapable of actually doing anything about it beyond exhortations. We are consequently dismissive of suggestions that m tpy of capacity will be removed in Some capacity will die, but in an existential fight for survival, it will be a messy, drawn-out business. The pain is forcing restructuring, but for now it continues to take place largely outside of China, where costs can be higher, but also more rational banking systems are in place. Closures in Turkey, Trinidad and Europe are discussed this month and we expect more throughout the year. It will be a tough one. Rebar in 2016 will trade at low levels Global* long product prices Global* long product price forecast Ferrous scrap Billet Rebar Wire rod January month-on-month % change 1.9% 1.3% 1.5% 2.8% year-on-year % change (37.9%) (31.9%) (28.9%) (29.7%) Ferrous scrap Billet Rebar Wire rod February month-on-month % change 0.0% (2.7%) (1.1%) (1.1%) year-on-year % change (25.7%) (28.3%) (24.1%) (24.7%) *This is an average of all relevant regional prices 1

4 economic briefing NORTH AMERICA US IP fell again. It dropped 0.4% month-on-month in December. It has now fallen every month since August and is currently down nearly 2% year-on-year. However, the December performance was dragged down by utilities (a warmer-than-usual winter) and a slowdown in previously buoyant automotive output. Other manufac-turing output however improved moderately with manufacturing output (excluding automotive) up 1% on an annualised basis in Q4. Ongoing weakness in the manufacturing PMI means that we expect a weak Q1, but low unemployment, high auto sales and strong consumer expenditure should boost the economy and consumer-oriented goods, while the year-on-year base level comparison for oil and gas should fade away. US Consumer Sentiment (as measured by University of Michigan) rose to 93.3 in early January as lower oil prices, higher employment numbers and rising housing prices are more important to consumers offsetting the poor start to equities. This appears to support our view that consumer expenditure and autos will continue to be strong through That certainly proved to be the case in January, when auto sales were a robust 17.6m units, with demand skewed towards trucks. EUROPE Eurozone IP fell 0.7% month-on-month in November with weakness in Germany and France. Output was adversely affected by energy production thanks to lower prices, while year-on-year gains remained positive at 1.1%. The final Eurozone manufacturing PMI came in at 53.2 in December, suggesting a modest pick-up in activity in Q Eurozone unemployment continues to fall it was down again to 10.5% in November and 10.4% in December is falling at around 10 basis points per month. This should underpin consumer expenditure and recovery in ASIA Chinese fixed asset investment held flat in the year-to- November at 10.2%, but dropped to 10% in December for 2015 as a whole. Capital investment in utilities, food processing and manufacturing sectors such as electrical equipment and computers continues to rise and offset the weakness in mining and construction-oriented sectors including steel. Chinese IP was up 6.2% year-on-year in November the best performance for several months but slipped to 5.9% in December. Domestically-oriented sectors such as autos, railways and electricity are performing well. The data in our opinion continues to show the relative success of the difficult Chinese strategy in moving away from capital investment and towards consumer expenditure without triggering a hard landing. This will not improve steel demand to a great extent and will continue to mean steel market difficulties, but the economy is not imploding. Meanwhile, there is always the potential for construction expenditure to stabilise in the latter part of 2016 as housing prices return. 2

5 Japanese IP fell 1.4% month-on-month and 1.6% year-on-year in December capping a poor year for industrial activity and steel demand. Export-oriented manufacturing is struggling with weak global demand, while domestic sentiment remains downbeat. This has contributed to further easing of the Japanese monetary policy, but this alone is unlikely to kickstart business activity. EMERGING ECONOMIES Russian IP fell 4.5% year-on-year in December. With the manufacturing PMI falling below 50, the outlook for Russian economic performance remains dismal. A weaker currency means rising inflation and consequently the central bank is keeping interest rates high, which is discouraging capital investment. The deep contraction in business activity shows no sign of even a modest recovery. Manufacturing output has been dropping at an even greater pace than IP down 6-7% year-on-year in the second half of Year-to-date change in Chinese fixed asset investment Year-on-year % change in Chinese industrial production* Source: Economy.com Source: Economy.com *3-month ave. 3

6 raw material briefing Iron ore stable Iron ore prices hovered around $40/tonne for most of the month with the monthly 62% Fe average of $41.17/tonne. We expect prices to remain at around this level through February and March amid limited activity over the Chinese New Year and caution thereafter. This is also typically a period when supply disruptions are possible flooding in Brazil and cyclones in Australia along with lower concentrate output within China, which favours lump and pellet prices. Inventory rundowns, further iron ore closures and rising steel output should provide modest support to prices in Q2, before further weakness later in the year. Major to trim production At 45m tpy of output in 2015, Kumba of South Africa is not a super-major in the context of iron ore compared to the Big Three or even Fortescue, but it is not insignificant either. Moreover, the rand has also depreciated strongly against the US dollar and lowered its cost base. Nevertheless, at current prices, it is losing money and is now restructuring. Cutting 4,000 jobs and reducing its mining plan will also reduce output considerably possibly as much as 25% in the next couple of years as it tries to ride out the current price environment. Coal pricing steady As in iron ore, the market is stable at low levels with Australian iron ore at $75-80/tonne fob through much of the month for spot cargoes. Once again, we expect no major change in the market situation with modest gains in Q2. Global Raw Material Pricing Table Iron ore Coking coal China spot (1) Asian contract (2) Asia contract (2) US spot (3) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan (f) (1) $/tonne cif Qingdao 62% Fe // (2) $/tonne fob Australia - 62% Fe fines (2) $/tonne fob Australia // (3) $/tonne fob US East Coast // Source: Platts, Steel-Insight 4

7 crude steel briefing Full-year WSA data is in. Unfortunately, up to half of December data is estimated and there were some revisions to 2014 data in China and elsewhere, which has changed some of the numbers. Nevertheless, the following is clear: Output contracted sharply in the final quarter particularly in Europe and North America. European output was down around 7% year-on-year in Q4 with NAFTA down almost 13%. The 4% + fall in global output in the final quarter was probably weaker than the overall decline in global demand. As such, we are going through a period of de-stocking for steel. Continued closures announced this month (AM in Spain, CSN in Brazil) and ongoing low prices has led us to revise down our forecast for non-chinese growth, while upping our Chinese numbers for Q1. Given our expectation of ongoing declines in steel output through at least Q1 and probably into Q2, we believe that de-stocking will continue. At some point, this should therefore trigger some tightness in the supply-demand balance and a moderate price response. The global round-up of analyst forecasts for the Financial Times averaged a very small gain in overall output for Clearly at a fall of 1.1%, we are among the more bearish analysts. We are forecasting a very weak H1 for steel production and a modest improvement in the second half. Global Crude Steel Production & Forecasts (000 tonnes) Q1 15 Q2 15 Q3 15 Q % change Q1 16 Q2 16 Q3 16 Q % change China 715, , , , , , , ,528 (2.4%) 188, , , , ,000 (3.4%) Other Asia 274, , ,523 72,002 71,768 71,006 70, ,713 (1.0%) 72,150 73,480 72,150 73, , % EU15 143, , ,623 37,000 37,072 32,829 32, ,474 (2.9%) 33,100 34,850 33,075 36, ,350 (1.5%) CIS 111, , ,207 25,025 25,612 25,612 25, ,263 (3.7%) 25,300 25,850 25,850 26, , % NAFTA 120, , ,798 27,581 27,941 28,609 25, ,783 (8.4%) 26,250 28,200 29,150 30, , % C & S America 48,342 47,338 46,368 11,275 11,465 11,195 10,833 44,768 (3.5%) 10,625 10,700 10,650 10,950 42,925 (4.1%) Other Europe 39,070 37,789 37,553 8,618 9,497 8,489 8,934 35,538 (5.4%) 8,475 9,000 8,700 9,400 35, % EU13 26,684 24,083 25,308 6,848 7,048 6,535 6,129 26, % 6,575 6,900 6,550 7,000 27, % Middle East 22,047 25,885 28,058 6,903 7,247 6,722 6,488 27,360 (2.5%) 6,650 7,200 6,500 7,000 27,350 (0.0%) Africa 15,122 15,813 15,020 3,982 3,652 3,471 3,375 14,480 (3.6%) 3,500 3,750 3,500 3,750 14, % Australasia 5,806 5,545 5,489 1,403 1,501 1,511 1,413 5, % 1,400 1,490 1,510 1,470 5, % Global total 1,520,731 1,603,585 1,634, , , , ,158 1,591, , , , ,645 1,572,725 Year-on-year % ch. 1.6% 5.4% 1.9% (1.5%) (1.7%) (3.4%) (4.2%) (2.7%) (4.6%) (4.7%) 0.7% 4.3% (1.2%) Source: WSA, Steel-Insight 5

8 north american steel briefing RECENT DEVELOPMENTS Scrap bounced early in the New Year after a period of de-stocking in Q4 2015, but with low utilisation rates since then, which have struggled to move over 70%, there was little incentive to push prices higher in February. The strong dollar means the trade balance is also a negative factor for scrap. Wire rod mills had cut pricing aggressively in H This meant that their spread over scrap was much tighter. As a result, they were quick to push prices back up in January when they raised transaction prices by $30/ton. They also somewhat more surprisingly held to it. We place prices at $440/ton ($485/tonne) ex-works for mesh grades. Rebar mills had been able to hold pricing (and consequently spreads) at higher levels as they lowered prices more slowly during H2. Combine that with seasonal weakness in demand in core markets and rebar mills held pricing flat through January. While there remains a range of prices in the market, we place the mid-point at $475/ ton ($525/tonne) ex-works. International long product prices trended down, thus widening the import arbitrage somewhat. One key area to note was the arrival of new suppliers in wire rod in December This is an area of potential concern, but is being driven by weak international markets and a strong dollar. US scrap and long product prices ($/tonne) MARKET OUTLOOK With higher prices for flat products and improved demand across the board, we expect crude steel utilisation rates to pick up later in Q1 and into Q2, which will provide modest support for scrap prices. Prices cannot rise too far as the support from international scrap will be far more muted. We expect no short-term movement in long product prices as mills will seek to hold pricing steady for now. However, stronger demand in Q2 combined with modest raw material push will result in attempts to push domestic prices higher in Q2. The exception to that could be some discounting by wire rod mills in February. Lead times remain short at around 2-3 weeks in general and the fragmented nature of this market could mean mills will quietly discount to secure market share. Domestic rebar pricing should hold, but imports will remain a key factor and a solid arbitrage remains for key importers such as CRP. The primary upside risk for this product remains another attempt to push out Turkish supply. US domestic vs import rebar ($/tonne) 6

9 Scrap up in New Year after de-stocking With flat product prices turning up and potential delays to scrap deliveries over January-February arrivals, mills were back buying after de-stocking in Q4. This pushed prices up around $20/ton to $200/l.ton in the Midwest with southern buyers paying even more. Some mills did not secure sufficient material, so were back purchasing again in February, while inflows remain slow amid winter weather and low prices. Prices rollover in February On the other hand, export prices will not be supportive, while the strong dollar is still facilitating imports. February was therefore a rollover in most markets. Utilisation rates plunged in December, and failed to get above 70% in January but the higher flat product prices could encourage higher output in February and re-starts by late Q1, providing further support for ferrous scrap by Q2. North American long steel statistics Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 USA* Rebar Shipments 5,577 6,232 7,231 7,710 2,089 1,867 1,669 1,666 1, Imports ,146 1, Exports Consumption 5,722 6,547 7,835 8,610 2,223 2,169 2,159 2,008 1, (8.8%) 14.4% 19.7% 9.9% Sept 15 Oct 15 Nov 15 Wire rod Shipments from AISI Extra production from reported** non-reported production** 2,161 2,642 2,495 2, ,627 2,760 2,570 2, Total production 5,276 5,960 5,569 5,456 1,442 1,352 1,177 1,209 1, Imports 1,015 1, , Exports Consumption 6,083 6,880 6,264 6,907 1,737 1,674 1,479 1,520 1, % 13.1% (9.0%) 10.3% Canada* Rebar Output n/a n/a n/a n/a n/a Exports Mexico Rebar Output n/a 3,561 3,511 3, ,011 n/a n/a n/a n/a n/a Exports n/a n/a n/a n/a n/a n/a n/a n/a n/a Imports n/a n/a n/a n/a n/a n/a n/a n/a n/a Consumption n/a 3,076 2,701 3,004 n/a n/a n/a n/a n/a n/a n/a n/a (12.2%) 11.2% Sources: AISI, Statcan, Steel-Insight / *Note: US data is in short tons, Canadian & Mexican data is in metric tonnes **AISI does not report all US wire rod production - this is our estimate - see April 2008 report for analysis / Numbers in Italics are estimates 7

10 Wire rod quickly responds to scrap gain US wire rod mills reacted quickly to trends in scrap prices. Gerdau and Nucor both raised prices by $30/ton for deliveries from February 1st with order books for both groups out just 2-3 weeks. Somewhat to our surprise, mills have been aggressive in pushing for the full $30/ton rather than discounting as we expected. Midwest prices were $ /ton in December, but there are no deals out there to our knowledge for less than $430/ton. Nevertheless, mills continue to offer at the top end of the $ /ton range and then work their way down, but are being a little more disciplined at the bottom end. In our opinion, this reflects the pressure that rod margins are under see chart. Despite this, lead times are not fully extended and buyers report regular calls from sales reps, and this may mean that there could be some discounting in February. Imports are still viable with Turkish mesh grade at $ /ton cfr, so once prices go above $420/ton in the Midwest, imports begin to look attractive. Import sourcing is an area to watch US imports of wire rod in December were more than 150,000 tonnes and from a wider variety of sources than normal. Significant volumes were from the UAE, UK, Russia, Belarus and South Africa as well as the usual suppliers of Japan and Turkey. Those smaller suppliers took 45% of the volumes in December 2015 compared to 11% of the total over the rest of the year. Should these seek regular business, it will bode poorly for the US market with prices remaining under pressure throughout the year. This is a particular concern given that new market entrants typically use price to secure market penetration. Rebar doesn t move With higher prices and a stronger spread, US rebar mills have not been able to pass through the higher scrap prices, particularly against the background of global weakness. Slack seasonal demand is also a factor, particularly in Northern and Midwest markets. Orders should begin to pick up in the latter half of February. Turkish rebar was at or below $350/tonne cfr or around $ /ton fot in Florida or East Coast ports. As such, the domestic rebar price may hold at around $ /ton with Midwest markets at the higher end of the range and larger buyers or those near ports able to secure the lower price. US rebar imports (000 tons) US wire rod imports (000 tons) Source: US Enforcement & Compliance, Steel-Insight Source: US Enforcement & Compliance, Steel-Insight 8

11 US rebar to scrap margin ($/tonne) US rod to scrap margin ($/tonne) US wire rod imports in December 2015 by source US wire rod imports in 2015 (Jan-Nov monthly average) by source 9

12 US long product prices ($/tonne) Ferrous yoy % scrap (1) change Rebar yoy % import (2) change Rebar yoy % domestic (3) change Wire rod yoy % import (2) change Wire rod yoy % domestic (3) change Jan (43%) 365 (31%) 520 (24%) 385 (30%) 485 (25%) Feb (26%) 355 (26%) 520 (20%) 375 (25%) 485 (19%) Mar (20%) 360 (25%) 520 (20%) 380 (24%) 485 (16%) Apr (15%) 370 (23%) 540 (17%) 390 (22%) 500 (12%) May (11%) 380 (23%) 560 (14%) 400 (22%) 525 (13%) Jun (12%) 400 (18%) 580 (11%) 420 (18%) 550 (11%) Jul (6%) 390 (15%) 600 (8%) 410 (15%) 570 (11%) Aug % 380 (10%) 600 (4%) 400 (9%) 570 (7%) Sep % 400 (1%) 580 (3%) 420 (1%) 550 (7%) Oct % 380 4% 560 0% 400 4% 550 0% Nov % 370 (3%) 550 2% 390 (3%) % Dec % 380 6% 550 6% 400 5% % Jan % 390 7% % 410 6% % 2009 ave. 240 (44%) 513 (45%) 562 (38%) 533 (42%) 626 (37%) 2010 ave % % % % % 2011 ave % % % % % 2012 ave. 409 (8%) 667 (9%) 761 (4%) 686 (9%) 779 (15%) 2013 ave. 390 (5%) 628 (6%) 731 (4%) 646 (6%) 732 (6%) 2014 ave. 383 (2%) 595 (5%) 714 (2%) 615 (5%) 725 (1%) 2015 ave. 245 (36%) 445 (25%) 619 (13%) 465 (24%) 580 (20%) 2016 ave. 223 (9%) 378 (15%) 557 (10%) 398 (15%) 532 (8%) (1) shredded cif average US mill (2) cif major port (3) ex-mill All prices are an average of a range of prices that are present in the market, and exclude grade and finishing extras 10

13 ALTERNATIVE SCENARIOS Base case - 60% probability Scrap prices corrected lower in the second half of Although there may be modest gains in scrap in Q thanks to higher operating rates at flat rolled mills, it is unlikely to return to 2014 levels realistically not for the next three years at least. Rebar margins stayed high through mid-2015, but lower-priced imports forced the adjustment by year-end. Wire rod, with its more fragmented competitive domestic supply, adjusted downwards first. With the strong dollar expected to remain a factor and cheaper scrap internationally, import offers for long products will continue to be below domestic prices and this will force domestic mills to remain aggressive to secure market share. Meanwhile there is a risk that more importers could seek to join the party, given emerging market currency weakness against the dollar. Margins may therefore be lower in 2016 than in However, underlying construction demand has been solid and should remain so through 2016, providing moderate support for volumes. Upside case 15% probability Unexpected strength in global raw material pricing would be the one upside driver, supported by the abolition of Chinese long product VAT rebates at some point, but we consider this relatively unlikely. A more likely surprise to the upside could come if changes in the US regulatory regime encourage US mills to have another go at rebar antidumping (from Turkey) and if successful, this could tighten the domestic market and push up prices and spreads to higher levels. Downside case 30% probability With the inventory chain now well-filled, US mills will remain on short lead times and have to cut domestic prices to match international arrivals and remove excess inventory and imports. This will lead to pressure on margins at steel mills. Under this scenario, we would expect US rebar stay below $500/ton through the whole of Forecast US scrap and long product prices ($/tonne) Forecast US domestic rebar prices ($/tonne) 11

14 european steel market briefing RECENT DEVELOPMENTS EU prices slipped in January. Scrap prices are off around 10/tonne amid slow export demand and reduced crude steel output within Europe. Production cutbacks across the board in flat products as well as extended idling at Riva Europe and mills southern Europe are contributory factors. Excess inventory both from imports and domestic producers amid sluggish seasonal demand is also weighing on business activity early in Many buyers in Europe don t actually need material now until March or April, so efforts by mills to sell them rebar or mesh wire rod at unchanged prices are meeting with little success. Current rebar prices are 330/tonne ex-works in southern Europe and 350/tonne in northern Europe with a slight bias to the downside in those numbers in early February. However, the strengthening of the euro means that the dollar decline is not as great. Chinese rebar imports were, as expected, hit with antidumping duties in the preliminary assessment. What was not expected was the low amount at just %. If confirmed at these levels, we believe that Chinese rebar will be back by mid MARKET OUTLOOK A return to operations by export mills in southern Europe and a work-through of excess inventory in Europe over February should permit a marginal improvement in ferrous scrap prices in March and into Q2. Weak international prices however will restrain a sharp jump. Rebar prices should move up alongside that as material goes to Algeria after a hiatus and some of the inventory is removed following lower production rates. Fundamentally, we are positive on demand for Europe in 2016, with construction rates expected to grow by 2-3%. However, EU mills may not see the benefit. A low Chinese tariff could see imports return from this source in the latter half of 2016, while exports will be hit by reduced demand of more than 1m tonnes from Algeria as the quota is well below 2015 shipments volumes. The result will be another year of low prices, reduced volumes and pressure on margins. Already Latvia s Liepajas appears to have exited the market and we expect that others may throw in the towel as balance sheets can no longer support the losses and companies are forced to restructure. Production has also been hit in southern Europe due to the announcement of an import quota in Algeria, which requires licenses. This stopped all sales in January although the market looks set to open again in February. EU long product prices ($/tonne) 12

15 Chinese rebar dumped, but surprisingly low tariff As expected, the EU Commission has found Chinese imports of rebar were dumped into Europe. However, somewhat surprisingly the preliminary margin was just % - substantially lower than we expected, particularly given that the Chinese were classified as a non-market economy. In our opinion, this amount (should it be finalised) would allow the Chinese to return to the market. For now, few deals are expected, particularly as there is plentiful material on the ground in the UK, but if the final numbers are confirmed, Chinese rebar will be back. Prices dip That stock on the ground is one of several negative factors in the EU long products market at present. After holding flat since the end of November, rebar prices dropped in late January as mills sought to secure sales amid sluggish interest. High inventories are a key factor, but so are falling scrap prices as mills slow production rates. With buyers across Europe not really in need of material until March, efforts by mills to sell February production at a flat price struggled. We have seen rebar come down by 10/tonne across most European markets to around 330/tonne ex-works in southern Europe and to /tonne in Germany and northern Europe. Even so, we expect that there could be further discounts in the near term. Mills however are looking to discount as little as possible and consequently there are a number or production cutbacks as mills seek to avoid getting minimal prices. Scrap prices struggling EU scrap prices have fallen by at least 10/tonne in late January/early February as international prices have dipped. Low output levels in southern European long product mills and weak crude output since Q4 are behind the declines. Crude steel output in Q in Europe was down over 6% year-on-year as flat and long product mills cut utilisation rates amid low prices and weak export demand. Cuts by Riva in France and Germany (see below) and low utilisation rates in January due to reduced export demand in Italy and Spain (see below) all contributed to the weakness in demand. Shredded is now at or below 170/tonne delivered in northern Europe. Selected European long product data (000 tonnes) Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 % change Rebar Italy (2%) Spain (9%) Germany (1%) Poland (1%) France % UK (3%) Others % Total 2,945 2,666 2,765 2,843 2,911 2,622 2,784 2,872 2,908 (0%) Rod Germany 1,485 1,270 1,380 1,460 1,465 1,275 1,330 1,305 1,370 (6%) Italy ,010 5% Spain (5%) France % Poland % UK % Others (0%) Total 5,007 4,404 4,691 5,023 5,040 4,404 4,592 4,866 5,098 1% Source: Various, Steel-Insight / Numbers in italics are estimates 13

16 Riva cuts production in Germany Riva will idle its German mill for two weeks in February amid weak demand and an effort to clear stocks. This follows an extended idling of its French mill until mid- January after it failed to restart post the Christmas break should see stronger demand In its Q1 forecast, Eurofer upgraded its final estimate for 2015 and downgraded its forecast for It now estimates a 2.0% gain in overall EU steel demand in Steel-Insight believes that it may have been moderately lower for long products. Eurofer had forecast a 2.5% gain in 2016 in October, but we were more cautious and Eurofer has also dropped its outlook to a 2.2% gain with 2.6% in Total European construction demand is expected to grow 2.3% year-on-year in German construction is forecast to grow by 3% in 2016 compared to 1% in According to forecasts by industry associations, a 4% increase in public sector infrastructure expenditure will be supportive as will a 5% increase in residential expenditure from higher housing demand. Non-residential private sector expenditure however will be flat. Eurofer is forecasting a 2.5% gain in total steel consumption in 2016 across the EU28, but we are more cautious and differ slightly in our view, although we believe an overall increase of 2-3% is reasonable for long products. After an estimated 7.8% increase automotive demand in 2015 Eurofer upgraded its forecast to 3.2% in We agree that there could be another 3-5% growth with falling unemployment and pent-up sales a major factor. That will not translate to higher output or prices The outlook for domestic EU long product demand therefore is positive for However, we continue to note that the current starting point is still around 25% below the peak of long product demand in Despite some closures since then, excess capacity remains in place in the EU market and with continued pressure from imports and lower exports, output in 2016 may fall. Given the extended period of pressure, we therefore expect to see further closures in Liepajas idles again After restarting less than a year ago, using Ukrainian billet for, the Latvian mill was idled again in January. With the Latvian government starting administration proceedings to recover assets, we do not believe that the mill will be re-started again under current ownership and could therefore be closed for an extended period if not forever. EU exports to be hit by Algerian quota Over the last three months, there has been considerable discussion within Algeria with regard to the import situation. Falling oil and gas receipts have hit government revenues and dollar receipts. Meanwhile, the import bill remains as large as ever. EU trade in long products (000 tonnes)* Net imports/(exports) EU long products (000 tonnes)* Source: Eurofer, Steel-Insight *3-month ave. Source: Eurofer, Steel-Insight *3-month ave. 14

17 That has triggered a response from the government to intervene in the steel market to manage rebar imports. The first move (5th January) was to suspend rebar imports. The second move was to announce an import quota of 2m tonnes in All rebar imports would be under license with importers forced having to apply for a license. Domestic output is assumed to be 1m tonnes from Tosyali (up from 800k in 2015) and up to 700,000 tonnes from Annaba, (compared to 200k in 2015). The latter may be optimistic given that the plant has yet to re-start and labour issues remain. It hasn t made 700k since The Algerian Ministry is therefore assessing that rebar demand will fall by around 7.5%. That may be somewhat optimistic, but on the other hand a shortfall from Annaba would account for that. Imports in 2015 were around 3m tonnes of rebar and these were already lower than the peak in A further fall to 2m tonnes will hurt EU rebar mills and the 1m tonnes are unlikely to be able to be pushed elsewhere. One potential upside could be if Algerian domestic demand surprises on the upside (pushing up prices), the government may expand licenses. However, we consider it unlikely given the collapse in oil prices and the cuts in the government budget. Market set to re-open in February With some applications now complete, trading looks set to restart with traders discussing deals in early February. They are likely to take place at around 325/tonne fob. We expect strong initial interest. Domestic prices jumped earlier in the New Year on news of the quota with current prices as high as 500/tonne ex-works, ex-vat, although this is actually off the peaks. Italian and Spanish mills will however be looking for business given that there have been no orders now for around 6 weeks. We expect a strong round of early bookings, but this will probably tail off once trade is normalised again. Export cuts will overload domestic market The loss of 1m tonnes of demand is significant given that output is around 11-12m tonnes. The lack of export orders to Algeria will hit Italian and Spanish mills hard in the short term. There is simply no other destination that can absorb this material. Mills may look to traders to push some material into the Middle East or other North African locations, but this will be limited. The result will be added pressure on EU prices. It could also be the last straw for some mills with further closures possible through European Steel Market Sector Outlook (year-on-year % growth) % sectoral steel consumption Q1 15 Q2 15 Q3 15 Q Construction 35 (0.6) Mechanical engineering 14 (1.4) 1.5 (1.2) (0.5) (0.4) 1.3 Automotive Domestic Appliance Other Transport (0.1) Tubes 13 (3.0) (4.4) (10.6) (5.1) (5.6) 2.1 Metalware Miscellaneous Total Source: Eurofer 15

18 EU28 rebar imports by source (000 tonnes) EU rebar to scrap margins ($/tonne) Source: Eurofer, Steel-Insight EU long product prices ($/tonne) Ferrous yoy % scrap (1) change Billet yoy % import (2) change Rebar yoy % import (2) change Rebar yoy % domestic (3) change Wire rod yoy % import (2) change Wire rod yoy % domestic (3) change Jan (34%) 300 (30%) 360 (32%) 385 (25%) 370 (31%) 365 (31%) Feb (31%) 285 (28%) 350 (27%) 380 (20%) 360 (27%) 355 (28%) Mar (19%) 290 (28%) 355 (26%) 390 (13%) 365 (26%) 355 (26%) Apr (20%) 300 (26%) 365 (24%) 400 (13%) 375 (23%) 365 (26%) May (21%) 315 (24%) 375 (24%) 425 (11%) 385 (24%) 375 (23%) Jun (21%) 320 (21%) 395 (19%) 430 (10%) 405 (19%) 395 (19%) Jul (21%) 315 (14%) 385 (16%) 430 (7%) 395 (16%) 385 (20%) Aug (12%) 300 (14%) 375 (13%) 420 (9%) 385 (13%) 375 (21%) Sep % 315 (7%) 395 (5%) 420 (5%) 405 (5%) 395 (13%) Oct % 310 0% 375 4% 410 0% 385 4% 375 (6%) Nov % 300 (3%) 365 (3%) 400 5% 375 (3%) 365 1% Dec % 310 7% 375 6% 380 0% 385 5% 375 4% Jan % 315 5% 385 7% 380 (1%) 395 7% 385 5% 2009 ave. 257 (42%) 429 (46%) 483 (46%) 493 (45%) 502 (45%) 513 (44%) 2010 ave % % % % % % 2011 ave % % % % % % 2012 ave. 404 (8%) 592 (10%) 665 (7%) 674 (8%) 683 (8%) 687 (10%) 2013 ave. 398 (1%) 548 (7%) 630 (5%) 626 (7%) 643 (6%) 636 (7%) 2014 ave. 368 (8%) 520 (5%) 593 (6%) 598 (4%) 603 (6%) 609 (4%) 2015 ave. 243 (34%) 368 (29%) 446 (25%) 449 (25%) 456 (24%) 458 (25%) 2016 ave. 208 (14%) 305 (17%) 373 (16%) 406 (10%) 383 (16%) 373 (18%) All prices are an average of a range of prices that are present in the market, and exclude grade and finishing extras 16

19 Forecast EU long product prices ($/tonne) Forecast EU rebar price ($/tonne) ALTERNATIVE SCENARIOS Base case 65% probability As we have continually noted, EU finished product pricing will remain under pressure from aggressive suppliers chasing limited business. This is despite some capacity rationalisation will be no different even if construction activity improves across the zone as a whole. Meanwhile exports will come under increased pressure due to budget cuts and FX shortages in Algeria. Import pressure may be slightly lessened amid a weaker currency and if Chinese rebar is excluded from the EU market, but domestic prices will have to price to import parity in order to avoid import surge from alternative destinations most notably CIS sources. Prices have come down on the back of lower scrap and gains in this product are likely to be modest, although we do expect an improvement off the very low levels seen in Q As such, rebar prices over 2016 are likely to trade in the /tonne range for most of the year, but the bias will be to bottom end of the range. Margins have remained under pressure through 2015 and 2016 may be an even bigger struggle for many mills and further consolidation or closures are not out of the question. Upside case 10% probability While there has been some closure and consolidation in the last 2-3 years, overall operating capacity remains elevated when compared to demand. As such, an upside to our EU forecast will have to come from higher-thanexpected global demand and raw material prices or a real collapse in the currency to parity with the dollar or below. Downside case 30% probability We continue to see little fundamental tightness in EU demand for long products, so our base case is already conservative, but the bias remains to the downside. Further falls in CIS currencies and weaker-than-expected Chinese demand would mean cheaper billet and finished products and this would keep scrap below $200/tonne through 2016 with knock-on effects on long product prices that would mean EU prices trading in the /tonne range for most of This remains a more likely scenario than any upside. 17

20 asian steel market briefing RECENT DEVELOPMENTS Chinese market activity has been slow through January culminating in a very quiet period prior to the New Year. Domestic prices held their elevated level through the second half of January at around RMB1,800-1,850/tonne ($240/tonne ex-vat) with margins better than previously, but still close to or below marginal costs. Iron ore was largely unchanged through the month. Export prices have also crept up, but to a far lesser extent as buyers hold off in the expectation of lower prices after the New Year. Export prices for rebar are holding at $250/tonne fob, but volumes have been limited thanks to buyers having inventory and with some pressure on markets from anti-dumping. Wire rod is $15/ tonne more. Billet on the other hand remains at $ /tonne fob with movements in the latter half of February limited to a few dollars either way. Activity here was steadier however. Final data indicates that Chinese wire rod and rebar consumption fell by 5% year-on-year in 2015 in line with our expectations. Output was just 4% lower thanks to higher exports. MARKET OUTLOOK Chinese mills are positioning for higher prices after the New Year break, but that means little. We see little instruction from central government to actually force closures, although they are now at least recognising zombie steel companies. We still expect some closures as credit is withdrawn after the New Year, but would suggest that it will get messy again with restructuring taking an extended period. Overall Chinese demand is expected to fall 4% in 2016 with exports down and output thus falling 5% The combination means we are cautious on the current rally and without a step-up in Chinese demand, we expect to see prices dip again by Q2. Demand in other Asian markets will remain lacklustre with pricing set to follow the Chinese down. We do see the possibility of an improvement in the second half of the year. After lower output globally in the first half, there could be a recovery in prices as the supply-demand balance tightens. This may give moderate support again to a price gain in the second half of the year, along with higher ore prices. Overall however, prices are set to remain close to marginal costs through most of the year. SE Asian long product import prices ($/tonne) Chinese domestic construction steel prices ($/tonne ex-vat) 18

21 China rally stalls We are now in a quiet period for Chinese steel trade. Prior to Chinese New Year (CNY), which is the week around 8th February this year, trading volumes are relatively thin. Much of the activity now is therefore positioning for post- CNY expectations. Mills are positioning by raising their prices for February deliveries. However, the price can be clawed back by discounts and rebates, which will vary depending on demand and pricing at the time. Nevertheless, it is indicative of their expectations. After steady gains from mid-december, domestic spot prices have stalled, albeit with rebar prices closer to RMB1,800-1,850/tonne in Beijing. The US dollar increase is not quite as dramatic thanks to the weakening Chinese currency, but is now nevertheless equivalent to $240/tonne ex-vat. Domestic distributors are looking to procure inventory in expectation of higher demand after the CNY. Export prices struggle Rebar is now available for export at $ /tonne fob with wire rod at $ /tonne fob. Export gains have been less than the gains in the domestic market as buyers have been very reluctant to commit to additional tonnage at the higher prices and have been constant in rebuffing the higher offers. Chinese exports were at elevated levels through the second half of 2015 and many international buyers are well-stocked, particularly as demand remains somewhat weak. These buyers are simply holding off in the expectation that Chinese mills will drop back in the future. That is a tricky call, but one which has paid off for virtually all of With no real Chinese production cutbacks in place, we also believe that it may be the right one. The chart shows that Chinese rebar output has been steady at 17-18m tonnes since the production peak back in Q2. Nevertheless, the possibility remains that mills may not return to higher production levels after the holidays based on poor profit and a lack of credit and this could tighten the market significantly. Billet is priced at the same level as rebar again this is up by around $10/tonne. Purchasing activity has been steadier here as buyers need to secure billet and it remains attractive compared to melting scrap. Zombie companies The Chinese government is at least referring to up to 200m tpy of steel capacity as zombie i.e. being kept alive by transfusions of credit from the banking system in the hope that this will keep them going until others go under first. However, identifying those companies and their existence does not mean that the government is willing to kill the zombies. There remain substantial impediments to restructuring, including; closures would require the crystallisation of bad loans, the loss of jobs, the loss of patronage, taxes and prestige that supporting a steel company can provide local authorities, hope that things will get better. Chinese long product market (000 tonnes) Oct-15 Nov-15 Dec-15 YTD % change Wire rod Output 122, , , , ,127 11,904 11,689 12,105 (4.2%) Imports (5.2%) Exports 3,009 5,612 8,010 10,653 12, ,052 1, % Consumption 119, , , , ,427 11,020 10,683 10,914 (5.1%) 15.8% 9.9% 9.0% 0.1% (5.6%) (6.8%) (4.8%) (9.1%) Rebar Output 151, , , , ,603 17,766 17,272 17,555 (4.3%) Imports (47.2%) Exports 2,465 3,121 4,805 13,048 13, ,081 1, % Consumption 148, , , , ,042 16,812 16,193 16,263 (4.9%) 16.1% 16.5% 14.2% 1.5% (4.9%) (0.3%) 0.1% (1.0%) Source: CISA, Chinese Customs, Steel-Insight 19

22 Despite the lofty intentions of the government that m tpy of capacity can be removed, we consider that this is an aspirational target and getting there will be very messy. Regional round-up It was a quiet month throughout Asian markets. Moderate downward moves in scrap prices saw some pressure on mills to pass these through in the form of lower prices of finished products. In Taiwan, rebar is $ /tonne ex-works in the domestic market. In Korea, mills adjusted their price downwards after quarterly negotiations with major consumers and agreed to a cut of $50/tonne or so to bring down the nominal contract price to $440/tonne. The primary reason is that Korean mills had been able to keep prices high in 2015 amid stronger-than-expected demand. However, that price resulted in a rise in Chinese imports, which totalled (including other sources) more than 1m tonnes in 2015 significant in a context of a 10m tpy market. The lower price in our opinion is still not sufficient to reduce the import flow particularly given the increased number of Chinese mills with Korean certification. In Japan, transaction prices are dipping even as mills are rolling over list prices. Weakness in construction activity has led to rising inventory and transaction prices have dropped to less than 50,000/tonne ($420/tonne) at distributors. This is leading to further pressure to consolidate. Godo Steel (NSSMC) is set to fully acquire the affiliated Tokai Steel located in Kyushu, while the Fair Trade Commission approved the acquisition of Kohtetsu by Osaka Steel (another NSSMC company). The NSSMC-led consolidation now has the company controlling almost 50% of the domestic Japanese market by our estimates. Japanese and South Korean Long Product Markets (000 tonnes) Apr-15 May-15 Jun-15 YTD % change S. Korea Output 19,704 20,086 20,349 1,785 1,822 1,770 (3.3%) Exports 3,421 3,601 3, (10.9%) Imports 4,647 4,827 5, % Consumption 20,930 21,312 21,981 1,965 1,986 2,028 (0.9%) 1.8% 3.1% 3.6% 0.0% 5.7% Apr-15 May-15 Jun-15 YTD % change Japan Output 29,334 30,550 30,743 2,366 2,532 2,532 (3.6%) Exports 4,773 5,223 5, % Imports , (23.0%) Consumption 25,539 26,289 26,654 2,008 2,128 2,100 (7.5%) 2.9% 1.4% (7.0%) (2.8%) (5.4%) Source: National Associations, Steel-Insight 20

23 Nominal profit/(loss) for average Chinese rebar ($/tonne) Domestic price premium over raw material costs ($/tonne) Chinese rebar output (000 tonnes) Chinese rebar exports (000 tonnes) Source: mysteel.com estimates based on China customs data 21

24 Asian long product prices ($/tonne) Ferrous yoy % scrap (1) change Billet yoy % import (2) change Rebar yoy % import (2) change China Rebar domestic (3) yoy % change Wire rod yoy % import (2) change China Wire rod domestic (3) yoy % change Jan (35%) 255 (35%) 260 (33%) 240 (28%) 270 (34%) 245 (26%) Feb (20%) 265 (27%) 265 (28%) 245 (22%) 280 (28%) 250 (22%) Mar (15%) 275 (26%) 275 (21%) 255 (19%) 285 (24%) 260 (19%) Apr (13%) 250 (31%) 270 (26%) 240 (25%) 280 (27%) 245 (25%) May (19%) 265 (28%) 260 (29%) 240 (24%) 270 (30%) 245 (23%) Jun (17%) 270 (23%) 255 (26%) 235 (20%) 265 (27%) 240 (20%) Jul (9%) 265 (16%) 265 (17%) 240 (13%) 275 (19%) 245 (13%) Aug (8%) 250 (17%) 275 (8%) 250 (4%) 285 (10%) 255 (4%) Sep (12%) 265 (9%) 290 0% 265 4% 300 (2%) 270 4% Oct (7%) 260 0% 275 0% 250 (2%) 285 0% 255 (2%) Nov % 250 (4%) 270 2% 240 (2%) 280 2% 245 (2%) Dec (2%) 260 4% 260 2% 235 0% 270 2% 240 0% Jan % 265 4% 250 (4%) 230 (4%) 260 (4%) 235 (4%) 2009 ave. 290 (41%) 434 (44%) 497 (40%) 458 (21%) 512 (39%) 452 (22%) 2010 ave % % % % % % 2011 ave % % % % % % 2012 ave. 426 (11%) 603 (9%) 632 (10%) 535 (13%) 647 (11%) 536 (12%) 2013 ave. 420 (1%) 553 (8%) 570 (10%) 483 (10%) 581 (10%) 489 (9%) 2014 ave. 375 (11%) 508 (8%) 470 (17%) 416 (14%) 483 (17%) 422 (14%) 2015 ave. 263 (30%) 323 (36%) 324 (31%) 285 (31%) 341 (29%) 289 (31%) 2016 ave. 227 (13%) 261 (19%) 268 (17%) 245 (14%) 279 (18%) 250 (14%) (1) shredded cif SE Asia (2) cif SE Asia (3) Shanghai market ex-17% VAT All prices are an average of a range of prices that are present in the market, and exclude grade and finishing extras 22