The global steel market is currently torn between rising production costs and declining demand for this commodity in the world’s major markets. Prices have fallen; and if anything, more correction seems to be in store for the second half of the year.
Steel prices in the European Union have experienced the steepest decline to date. This is despite production constraints in the region due to cost pressures. Many steelmakers have cut production. The outlook in the region is far from encouraging as demand has so far contracted in annual terms.
The Russian-Ukrainian war led to a sharp rise in the prices of energy products, including crude oil, natural gas and coal. Because steel manufacturing is energy intensive, steel production costs have increased. Worse still, supply chain challenges have combined with rising energy costs that have weighed on production in the broader manufacturing sector. These issues are unlikely to be resolved any time soon, experts say.
A recent report by the World Bank predicts a slowdown in global GDP growth to 2.9% in 2022. It highlighted the imminent risk of stagflation, a combination of high inflation and slowing growth. The pain of stagflation could linger for years unless major supply increases are triggered, he warned.
Thus, the slowdown in GDP growth will certainly weigh on the demand for steel as the raw material is known as a “growth” raw material since its demand is positively correlated with growth.
Status in China
Meanwhile, the world’s largest steelmaker, China, has resumed ramping up production after authorities eased emissions restrictions on the steel industry. According to data from the National Bureau of Statistics, China’s steel production already hit a 10-month high in April.
Interestingly, China’s exports of steel products jumped to 7.7 million tonnes in May, the highest level in a year, according to customs data. Admittedly, local demand for the Asian major is rather moderate. The rise in iron ore imports into China (over 90 million tonnes) in May suggests a continued recovery in steel production.
Reflecting these realities, SHFE rebar prices in China have rallied lately, while the LME futures contract continues to decline. The situation is exacerbated by inflation, policy rate hikes by major central bankers, trade sanctions and unresolved supply bottlenecks. Consumer confidence in all geographies is down.
The US Fed and the ECB are expected to raise rates for the rest of the year. Lockdowns in China and the housing downturn further cloud the outlook for steel. All this suggests that steel prices have even more decline. A further decline of up to 10% from current levels should come as no surprise.
(The author is a political commentator and commodity market specialist. Opinions are personal)
June 11, 2022