BHP Highlights that Steel Profitability Sweet Spot Could Be Over
Strategic Research Institute
Published on :
18 Aug, 2022, 6:50 am
Global mining giant BHP while announcing results for FY 2022 has opined that if the profitability sweet spot is over, and this is a point of uncertainty, we are back in a world of significant tradeoffs. BHP’s Market Analysis & Economics Vice President Dr Huw McKay wrote “The abrupt ending to the strong run of profitability across calendar 2021 and the March quarter of 2022, which had provided a fillip to a number of struggling mills after some very tough few years both prior to the pandemic and then in calendar 2020, could have far–reaching consequences. Improving cash flow had enabled a tangible acceleration of deleveraging efforts and boosted shareholder returns. It may also have sparked more ambitious Decarbonisation efforts, the financing of which has always been a question mark in this traditionally low margin sector.”
Dr McKay wrote “The first half of calendar 2022 has seen YoY growth rates between China and the ROW converge, after smoothing for the lumpy base effects that afflict YoY calculations.”
Dr McKay wrote “Six months ago, we wrote that our starting point for thinking about calendar 2022 is that a continuation of China’s policy stance of zero growth ought to be the baseline, with scenarios built around that. A fourth year above 1 billion tonnes accordingly seems likely, as the nation’s plateau phase extends. Since we penned those words, the authorities have moved the goalposts on the annual production target, shifting from zero–growth to a net reduction, while remaining silent on the scale of said reduction. There have also been moving parts to reconcile across end–use sectors, feedstock availability and disrupted trade flows, among others. The net impact of these forces on the statement above is that it still feels broadly valid, but the ultimate route to those ends will be a circuitous and volatile one.”
Dr McKay wrote “Broad–based strength across the majority of Chinese end–use sectors in the first half of calendar 2021 gave way to a near universal softening in the second half. Housing starts were particularly weak, and they have remained that way in calendar 2022 to date. Infrastructure has been the lone true bright spot, with other major non–housing sectors (transport and machinery) experiencing shallow contractions. Knowing that information and adding it to the reality of the record run–rates seen in the same half a year ago, it would be reasonable to guess that steel production would have been deeply negative YoY in the first half of calendar 2022.”
Dr McKay added “We estimate that net exports of steel–contained finished goods account for slightly more than 10% of Chinese apparent steel demand. That is a lower degree of external exposure than, say, Japan or Germany, where the number is about one–fifth. An additional 4% or so of Chinese production is exported directly. The direct trade surplus in steel has fluctuated widely since the pandemic began. It fell into deficit in the middle of calendar 2020, and then rebuilt quickly back towards pre–pandemic levels in the middle of calendar 2021. With an eye to their commitment to restrain growth in total steel production, the authorities stepped in at this point, cancelling export VAT rebates for most steel products and removing import tariffs for semi–finished steel. Net exports recorded a 41 million tonne per annum outcome for the whole year, with a run–rate of 31 million tonne per annum in the second half. The surplus then jumped again in the first half of calendar 2022, aided by the disruptions in the FSU, with the month of June-2022 recording a sizeable surplus of 84 million tonne per annum up 68% YoY, and the whole first half coming in at 52 million tonne per annum.”
Dr McKay concluded “The exact trajectory of annual production run–rates that will achieve this near doubling of the stock is uncertain. Our base case remains that Chinese steel production is in a plateau phase in the current half decade, with the literal peak to be the cyclical high achieved in this phase, with 1065 million tonne in 2020 being the clubhouse leader in golfing terms. Strategically speaking, it is the plateau concept, not the peak concept that matters now. Having attained and sustained 1 billion tonne plus run–rates for three years going on four, defining the literal peak year and/or level is no longer anything more than a tactical question.”