Strengthening Global Steel Market Bodes Well for Molybdenum

  • World steel production rose 4.5% YOY in 1H 2017
  • U.S. steel industry rebounds in 2017
  • Renewed growth in major emerging markets and world’s largest economies
  • China’s intensity of moly use in steel trends higher

by Bruce Hansen

In the molybdenum business, the steel industry is our largest customer. More than 70% of molybdenum’s first use is in steel.

Without molybdenum-containing specialty steels, there would be neither the Burj Khalifa in Dubai, the world’s tallest skyscraper, nor the Jiaozhou Bay Bridge in China, the world’s longest bridge over water, nor the Airbus A380, the world’s largest passenger aircraft. In the U.S., there would be no Trans-Alaska Pipeline, Golden Gate Bridge, St. Louis Gateway Arch, Empire State Building or One World Trade Center if it were not for the applications of these specialty steels.

Molybdenum, or moly for short, is an essential alloying element contributing to the strength, corrosion resistance and other properties of steel, enabling it to withstand high temperature and other extreme environments.

Since the 1930s, and particularly in the post-World War II reconstruction, moly-containing steels have been the material of choice for industrial designers and engineers to build a wide variety of their strongest and most durable products.  Specialty steels are used in every significant sector of the global economy, including energy, construction, automotive, transportation, aerospace and defense.

In this issue of the Moly Bits, we focus on the broader steel market. We will delve deeper into major end uses of steel that contribute to our quality of life and global industrial development in the next issue.

The steel market is off to a strong start in 2017. After a sluggish 2015, it bottomed in mid-2016 and has been steadily recovering.

Chart 1: Monthly Global Crude Steel Production
(ROW means the “Rest of the World”.)

Source: World Steel Association

Global steel production rose 3.2% year over year (YOY) to 141 million metric tons in June 2017, according to the World Steel Association (WSA). June 2017 marked the 14th consecutive month of positive YOY steel production increase. Asia accounted for an estimated 69% of global steel production for June 2017. During the month, China and South Korea led the world with YOY steel production increases of 5.7% and 7.7%, respectively.

The pace of growth during the first half of 2017 was a sharp contrast to the 1.7% contraction seen during the corresponding period in 2016. In the first half of 2017, world steel production rose by 4.5% YOY. Nearly ALL of the major producing countries registered positive growth.

Table I: Steel Output Growth in Top 10 Producing Countries

Source: World Steel Association

In the major developing economies such as Russia (5th largest steel producer) and Brazil (9th largest steel producer), which had struggled with recessionary woes in 2016, growth appeared to be back on track during the first half of this year.

Both countries are forecast to resume positive year-on-year real Gross Domestic Product growth this year (0.3% projected for Brazil and 1.4% projected for Russia), according to the International Monetary Fund’s July 2017 forecasts. During the first half 2017, steel production rebounded in both countries, with a 0.8% increase in Russia and a robust 12.4% increase in Brazil.

In the developed world, steel production growth was also impressive in the first half 2017, with major turnarounds recorded in Japan (up 0.5%) and in the United States (up 1.3%). In fact, the world’s largest economies appear to be in “synchronized global expansion,” as Fidelity Investments noted recently.

Chart 2: World’s Largest Economies in Synchronized Expansion

Source: Fidelity Investments’ Quarterly Market Update for 2Q 2017

Not surprisingly, the steel industry is also seeing a rise in the capacity utilization rate as shown in Chart 3. The global steel capacity utilization of 73% in June 2017 was 1.4 percentage points higher than June 2016.

This is primarily due to a reduction of excess capacity in China, which shuttered 42.4 million tonnes of crude steel capacity in the first half of 2017, as well as healthier profit margins for the overall steelmaking business – in Asia and elsewhere – which encouraged many industry players to raise their run rates. While excess capacity remains a major concern, the steel industry is gearing up for a healthier future with capacity utilization recovering to late 2014/early 2015 levels.

Chart 3: Monthly Global Steel Production vs Global Steel Utilization

Source: World Steel Association, BMO Capital Markets.

Based on WSA data, the trailing three-month average of the capacity utilization rate  through June 2017 was 72.8%, a more than two percentage point improvement from the first quarter 2017, indicating a stronger global economy.

The cyclical trends of steel production align to some extent with the global economic cycles and world industrial production. Following a sharp drop in steel production in 2009, global steel production generally trended higher. This recovery of output volumes hit a ceiling around the middle of 2014, followed by a shallow dip in 2015.

Chart 4: Correlation of World Industrial Production and World Steel Output
(Monthly, April 2006 – June 2017. World Industrial Production through May 2017.)

Source: CPM Group, CPB Netherlands Bureau for Economic Policy Analysis and World Steel Association

We believe we are in the early stages of another round of recovery, led by steelmakers in emerging markets, particularly in BRIC countries. A soft landing of the economy in China, robust growth in India, and the turnaround of Russia and Brazil are driving up steel demand growth in these markets.

The recovery of emerging markets is crucial for the steel industry. The amount of finished steel products consumed worldwide rose by 32% from 2006 to 1.5 billion tonnes in 2016, stated the World Steel in Figures 2017 report by the WSA.  In 2016, most of the growth in finished steel goods came from new industrializing nations of Brazil, China, India, Iran and Mexico, according to the report. (Finished steel is defined by Platts as a steelwork’s end products, such as bar, plate, beams and coil.)

Chart 5: Global Steel Use in Terms of Finished Steel Products 

Source: World Steel in Figures 2017, World Steel Association.

Growth in the mature markets is led by increased industrial activities in the United States, while Japan and Europe are also showing positive degrees of growth.

In the U.S. steel market, we have noticed resilience in steel demand throughout the summer as the typical seasonal demand softness did not materialize.  In July, steel shipments were up 1.4% YOY, according to a recent report by the Metals Service Center Institute. This occurred at a time of lower steel product inventories, which was down 3.9% in July from a year ago.

WSA projects that world steel demand will increase by 1.3% YOY to 1.54 million tonnes in 2017 and rise by a 0.9% to 1.55 million tonnes in 2018.

Chart 6: World Steel Association’s Global Steel Demand for 2017 and 2018

The CPM Group’s Molybdenum Market Outlook, March 2017, projects moly demand from the steel sector to grow at a compound annual growth rate (CAGR) of 3.7% from 2018 to 2020. Over 2020-2025, CPM expects moly demand growth from steel to rise to a CAGR of 3.8% from expanding global wealth.

Over 90% of total global steel output is in carbon steel. This type of steel, however, accounts for merely 11% of the molybdenum consumed for all steel uses. Carbon steel lacks corrosion resistance and underperforms in high temperature environments, making it less suitable for more sophisticated industrial applications that are required in later stage industrialization.

Source: CPM Group

As emerging economies industrialize, their use of higher strength and stainless steels increases. This helps lift the intensity of moly use in their steel industries.

China has maintained its pace of growth as the world’s second largest economy after the United States. China consumes approximately a third of the world’s moly and produces approximately half of the world’s crude and stainless steels.

From 2007 to 2016, China has increased its average intensity of use of molybdenum approximately 5% to 8.6 kg of moly per 100 tonnes of steel, according to the CPM Group.

China’s moly use is well below the world average intensity at 14.3 kg of moly per 100 tonnes of steel, as shown in Chart 2. CPM estimates that if China’s use reached the world average, the country would need an additional 100.6 million pounds of molybdenum per year, which is the equivalent of 20% of the total amount of molybdenum consumed in 2016.

Chart 8: Moly Use per 100 Tonnes of Steel, 2016

Source: CPM Group, World Steel, IMOA, Antaike

The largest molybdenum application in steel is in full alloy or engineering steel, which includes oil country tubular good (OCTG) steels. Fully alloy steels have heavy industrial applications in chemical and energy facilities and automotive components. (For reference, please see the July 2017 Moly Bits about the rebounding oil and gas industry as a demand driver for molybdenum.)  CPM projects growth in full alloy steel to be at 3.2% over the 10-year period ending in 2025.

The second largest category of molybdenum’s steel use is stainless steel. As a result of stainless steel’s value-added properties in many of industrial and residential applications, stainless steelmakers can register higher output growth during rapid industrialization and increased standards of living around the world.

Chart 9: Global Stainless Steel Production

Source: International Stainless Steel Forum

CPM estimates that carbon steel demand growth foreshadows stainless steel demand by 8-10 years. This is because stainless steel consumption increases during the later cycle of industrialization in developing economies and during economic recovery of advanced countries. Moly used in stainless steel is estimated to rise at a 3.5% rate from 2016 to 2025, according to CPM.

Chart 10: End-Use Molybdenum Demand Projections
(Million Pounds)

Source: CPM Group. Note: Other Chemicals include lubricants, pigments and other chemical demand.

We will delve further into the end uses for specialty steels, including technological advancements for enhanced moly steels, in the next Moly Bits.

The push and pull of cyclical market forces on steel will filter into the molybdenum market. Growth in industrial production and greater intensity of moly use in steel, particularly in emerging economies, will ultimately drive the molybdenum market.

The macro trends benefiting moly demand fundamentals over the long term are well underway. General Moly (NYSE AMEX and TSX: GMO), as the only remaining pure-play, primary molybdenum company traded on Western stock exchanges, seeks to maximize the value of this metal for its shareholders. The steel industry’s ongoing recovery will allow moly to share in steel’s success.

Moly Bits is a new blog published by General Moly, Inc. Bruce is Chief Executive Officer of General Moly. As a mining engineering graduate of the Colorado School of Mines, Bruce appreciates construction in all forms and looks forward to developing the Company’s Mt. Hope Mine in Nevada. 

Market Corner

 

This message is the opinion of the writer. General Moly does not publish any updates or revisions of opinions nor of the information presented except as required by securities laws.

The information presented contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the safe harbor created by such sections.  Such forward-looking statements include, without limitation, (i) estimates of future molybdenum, other commodities and markets, as mentioned, prices, demand, supply and/or production; (ii) estimates of future capital expenditures; (iii) statements regarding cost structure, project economics, or competitive position; (iv) statements regarding cost structure, project economics, or competitive position, and (v) statements related to potential market signals.  Where the Company expresses or implies an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis.  However, forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, metals prices and production volatility, global economic conditions, currency fluctuations, increased production costs and variances in ore grade or recovery rates from those assumed in mining plans, exploration risks and results, political, operational and project development risks, adverse governmental regulation and judicial outcomes.  For a more detailed discussion of such risks and other factors that could affect the Company, see the Company’s Annual Report on Form 10K, which is on file with the Securities and Exchange Commission, as well as the Company’s other SEC filings.

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