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Risks to muted steel recovery

Steel demand is set to grow by a marginal amount this year, but prospects for seaborne steel trade in 2023 look decidedly better – although the war in Ukraine is a significant downside risk in any forecasts.

The World Steel Association’s (worldsteel) latest Short Range Outlook (SRO) for 2022 and 2023 forecasts that steel demand will grow by 0.4% in 2022 to reach 1,840.2 million tonnes after increasing by 2.7% in 2021. Growth of 2.2% is then predicted for 2023 with demand set to reach 1,881.4 million tonnes.

But the forecast acknowledges the ongoing war in Ukraine and is, according to worldsteel, “subject to high uncertainty”.

Máximo Vedoya, chairman of the worldsteel Economics Committee, noted that the SEO had been made “in the shadow of the human and economic tragedy following the Russian invasion of Ukraine”. Acknowledging that the recovery in global steel demand in 2021 was stronger than expected in many regions, Vedoya said that a sharper than anticipated deceleration in China led to lower global steel demand growth in 2021. Meanwhile, for 2022 and 2023, the outlook is “highly uncertain”, he said. “The expectation of a continued and stable recovery from the pandemic has been shaken by the war in Ukraine and rising inflation.”

Myriad of disruptors
Commodity prices, and in particular for the raw materials needed for steel production, have already been impacted by the war in Ukraine. Add to the mix the rise in energy prices and the global steel industry will be hard hit by the conflict. Supply chain disruption – already a factor before Russia’s invasion of Ukraine – and volatility in the financial markets will only exacerbate steel supply issues.

“Such global spillovers from the war in Ukraine, along with low growth in China, point to reduced growth expectations for global steel demand in 2022,” noted worldsteel, adding that there are further downside risks from the continued surge in virus infections in some parts of the world and rising interest rates. “The expected tightening of US monetary policies will hurt financially vulnerable emerging economies,” it said. China’s continuing zero-Covid policy and the disruption that strategy is causing to global shipping markets will also have a knock-on effect on the steel sector.

Looking further out, worldsteel describes its 2023 forecast as “highly uncertain”. Its forecast for 2023 assumes that the confrontation in Ukraine will come to an end over 2022 but that the sanctions on Russia will largely remain and the fractious geopolitical situation caused by the invasion presents “long-term implications” for the global steel industry. In particular, worldsteel highlights a possible readjustment in global trade flows, a shift in energy trade and its impact on energy transitions, and continued reconfiguration of global supply chains.

China’s path
China’s thirst for steel – a bellwether for the industry – waned in 2021 as a result of tough government measures on real estate developers. Consequently, steel demand from China is expected to remain flat in 2022. Government stimulus to boost infrastructure investment and stabilise the real estate market are only expected to turn an, albeit small, positive lift in steel demand in 2023. That lift could be boosted by more substantial stimulus measures in the face of a weakening external environment.

In other developing and emerging countries, rocky recoveries from the pandemic have led to surging inflation, which has led to monetary tightening cycles. worldsteel noted that steel demand in the developing world excluding China grew by 10.7% in 2021, marginally down from its earlier forecasts, but continued challenges will curtail steel demand growth to just 0.5% in 2022 and 4.5% in 2023 in these economies.

Advanced economies have fared better with a strong recovery in 2021, especially in the EU and the US. But the outlook is weaker for 2022 largely due to inflationary pressure. Steel demand in the developed world is forecast to increase by 1.1% and 2.4% in 2022 and 2023 respectively, after recovering by 16.5% in 2021.

Construction promise
Of the main steel sectors, construction posted record growth of 3.4% in 2021 with pandemic recovery programmes driven by infrastructure commitments. The energy transition will further feed the need for steel in the construction sector over the forecast window. However, as worldsteel noted, the construction sector “faces some headwinds from rising costs and interest rates”.
Steel data specialist MEPS International, noted that buyers in the building segment are now attempting to guarantee steel supply for ongoing projects, but very expensive prices are eliminating their profit margins. This could lead to new projects being delayed, as budgets are recalculated and higher costs possibly rejected.
The automotive industry, meanwhile, did not bounce back so successfully in 2021 as the sector was plagued by supply chain bottlenecks. The automotive sector will acutely feel the consequences of the war in Europe, which will further hamper any recovery and keep steel demand in check, worldsteel said.

MEPS noted that just as the outlook for the automotive industry was beginning to improve and chips shortages started to be resolved, a number of vehicle manufacturers, particularly in Germany, started to cut output again due to lack of wiring and cable harnesses, plus tightening supply of metals such as aluminium and palladium. “Shortages of semiconductors and other essential components are expected to worsen,” said MEPS. “Consequently, steel requirements from the auto sector are likely to fall. Moreover, declining consumer confidence would diminish sales of new vehicles.”
Source: Baltic Exchange

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