Global Steel Sector Outlook Revised to Neutral on China Reopening

Fitch Ratings has revised its global steel sector outlook to Neutral from Deteriorating due to stronger demand in China following its reopening and increased government infrastructure spending. Our earnings expectations in North America, India and Brazil remain above mid-cycle levels, while performance of European steelmakers remains more affected by weak economic growth and high and volatile energy prices.

Stronger-than-expected performance in China is the main driver for the outlook revision, although demand from key steel consumer sectors is uneven. Strong growth in infrastructure is spurred by large government spending, which also supported our revision of China’s steel sector outlook to Neutral. Demand from manufacturing fluctuates, although the purchasing managers’ index points to a recovery. Demand from the property sector is declining and we expect it to remain weak.

China’s steel demand is largely driven by the construction sector. The stronger-than-expected infrastructure growth and a seasonal construction pick-up in 3Q23 will increase steel demand, while we believe that producers are likely to keep production volumes steady. This, together with a correction in raw material prices, will widen producers’ margins.

The US steel industry has undergone meaningful consolidation in recent years, which we believe has improved supply discipline. This, in addition to investments focused on reducing costs and increasing value-added production, has led to generally higher and more stable margins through the cycle. We view the Infrastructure Investment and Jobs Act, US Inflation Reduction Act, and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act as supportive for US steel demand.

Energy price hikes led to muted industrial activity in Europe in 2H22. High steel inventories led to capacity curtailments to rebalance the market. Some of these assets are coming back online as market sentiment has improved and in anticipation of the re-stocking cycle. Even though the recovery in European steel demand remains fragile, steelmakers’ earnings per tonne remain reasonable, supported by contracted volumes with more stable prices than on the spot market. Supply-side disruptions, such as reduced procurement of semi-finished products from Ukraine and Russia and the earthquake in Turkey, have supported prices. A sustained lower metallurgical coal price and continued electricity price volatility in Europe means that blast furnace operations benefit from better earnings visibility compared to electric arc furnace producers.
Source: Fitch Ratings