Like the prices of oil, gas and many other metal commodities, global steel prices have been dropping since mid 2014—with the downhill slide speeding precipitously through the first quarter of 2015, reaching its lowest point since 2009, according to Market Realist. New orders for durable goods requiring steel also fell by $1.2 billion in April 2015, according to a report just released by the U.S. Census Bureau.
When China Sneezes, Steel Catches Cold
While the economic recovery from the recession in the U.S. and Europe has been bumpy at best, the Chinese economy was ballooning in strength, fueling steel demand for several years. And while the Chinese economy is still expanding, the World Bank has noted a pumping of the breaks. After growing at an average 10.4 percent annually between 1990 and 2011, the Chinese economy has slipped down to a growth rate hovering around 7 percent according to Fortune. The same report from the World Bank lowered its global growth forecast for 2015 down from 3.4 percent to 3 percent, partially due to the slowdown in China. Time will tell if that forecast will be revised (up or down) before the sun sets on 2015.
Steel can’t help but feel the effects of a slowing Chinese economy according to Supply Chain Management. The demand for Chinese goods abroad has slowed, both in the West and in growing economies. One of the biggest driving factors that was fueling the Chinese economy previously was a vigorous demand for construction goods such as steel, copper and cement as they were expanding factories and throwing up apartment blocks nearby.
That said, the Chinese economy is still growing—just not as quickly, or as confidently as it was. But there are real and present structural problems within the Chinese economy that Chinese officials seem slow to address. The real estate boom that seems to be collapsing is just one of these issues. Chinese who were sinking their new-found fortunes into new homes just a few years ago are watching their equity slip away. This makes even the tycoons of the Chinese economy think twice before investing further into the steel and concrete-heavy real estate industry. Couple these problems with overproduction of and at factories and overstock on the market for Chinese goods, and there just isn’t the strong Chinese demand for steel that there has been.
Changes in the Oil and Gas Industry: A Double-Edged Sword
While China’s economy seems to be faltering, another tricky spot for the steel industry is the sudden drop in gas and oil prices, precipitated by a host of changes in those industries. Traditional oil and gas companies, as well as those fueled by hydraulic fracturing techniques rely heavily on steel. Forbes notes that while the fracking boom created a boost in steel demand for some years, the fracking boom also helped cause an oversupply of oil and gas on the market, which led to the price drop. The market suddenly had a vast increase in supply from by hydraulic fracturing in the U.S.
Several troubling factors are at play here for the steel industry. Some oil and gas fields are starting to go quiet to halt the downward price slide. Forbes also quotes the International Energy Agency as reporting that new oil and gas production projects could slow down by 10 percent this year if oil and gas prices do not recover, which would have a significant negative impact on the demand for steel.
Hope for Steel at Home?
While things seem to look challenging for the steel market in 2015, the global and domestic economy is a complex system with hundreds of factors to consider. And there are some positive spots to consider domestically:
- The automotive industry is strong right now. Demand for new cars should top 17 million units in 2015 according to Forbes.
- The U.S. Census Bureau also reports a 20 percent jump in new housing construction since April.
While the data shows difficulties on the horizon, some of which are already being felt, knowing the lay of the land is half the battle for navigating rough waters and coming out strong.