After peak oil, peak steel?

You’ve heard of peak oil, but you may soon start hearing about “peak steel”.

Or you will if you listen to Eiji Hayashida, chief executive of JFE Steel of Japan. The head of the world’s fifth biggest steelmaker told the FT that from around 2015 world steel output will reach a plateau for at least 5-10 years, driven both by resource constraints and a weakening in demand.

It is hardly the consensus view – but the idea is gaining ground.

Among those who have bought into the notion is Sajjan Jindal, managing director of JSW, India’s third biggest private sector steel producer. Jindal thinks there is a good chance that in a few years steel output could peak at around 1.7bn tonnes a year, from the expected figure of 1.4bn tonnes in 2010.

He believes output will be constrained by efforts to limit carbon dioxide emissions – the steel industry accounts for about 4 per cent of manmade production of the gas – together with the negative impact on the environment of digging up the iron ore that is the starting point for most types of steel.

Steel is the world’s most widely used industrial material, with emerging markets now the dominant producers: China alone will likely this year account for 45 per cent of output, and with India, Brazil and Russia together producing another 11 per cent.

While output of the metal has doubled since 1973, the most rapid growth has come in the past decade, when production has leaped two thirds. As an indicator of global trends, however, the statistic is misleading.

The growth is almost all China. Of the extra 550m tonnes of the metal likely to emerge from the world’s steel mills this year compared to the amount made in 2000, around 90 per cent will come from China-based plants, according to industry forecasts.

Growth in other Bric countries has been fairly rapid: India, Brazil and Russia will have pushed up output between 2000 and this year by 140 per cent, 25 per cent and 8 per cent respectively. But in many other countries, steel production has been in decline. Steel output this year compared to 10 years ago is likely to show a fall of 22 per cent in the US, 39 per cent in Britain and 7 per cent in German.

Over the past half a century, the industry has improved quality so the metal is tougher than it was, allowing steel users to utlise less for anything from cars to bridges. Throw in the enviromental question and the fact that Chinese steel production seems unlikely to climb at anything like the rate in the next decade as in the past – and the peak steel theory doesn’t look so ridiculous.

But, it is still fairly far-fetched. Some of the environmental constraints on steel production seem likely to fade in the next few decades, as “greener” forms of energy production start to gain ascendancy, and as recycling of steel accounts for a greater proportion of production. (Already one third of steel production comes from scrap, a figure that could rise to half).

Even for steel for which “virgin” iron ore is required, improved production methods are likely to minimise the environmental damage caused by mining. The earth’s crust contains enough iron to feed the world’s steel mills at current rates a 1 billion years.

As for demand, Rod Beddows, chief executive of Hatch Corporate Finance, a banking group, calculates that in 2050 the world’s population will require 300kg of steel per person to fit in with people’s requirements for higher living standards. (Per capita consumption today is 187 kg for the world, with developed world consumption being roughly 350kg per person.)

Even allowing for the use of lighter steel in products such as cars and washing machines, plus the substitution of other materials such as tough plastics in place of metals, it seems unlikely that demand per person will be much lower than Beddows’ projections, always assuming the world steers clear of catastrophe.

Given a likely world population of 9bn in 40 years’ time, if Beddows’ sums are correct, this could mean global steel output would be running at almost 3bn tonnes a year, or nearly twice as much as today. The debate would then be not about whether steel manufacturing has reached a limit. Instead it would be about how to make that much steel, whilst also protecting the enviroment, financing new investments and generating profits. In other words, much the same as today.

Financial Times