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Struggling global steel industry faces double whammy by Covid-19 outbreak

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  • Did the Covid19 outbreak magnify the global steel industry’s woes? 
  • Will the unlock phase be able to recover steel industry from its plight?

 

The year 2019 was not a great year for the global steel industry as crude steel production grew by merely 3%, significantly lower compared to its intermittent peak (6.3%) achieved in 2017. Similarly, the global finished steel consumption grew by only 3.5% (nearly half compared to the high of 7.5% in 2017). China, however, was an exception as it witnessed 8% growth in its crude steel production and increased its share in the global output from 52% to 54%. The share of most other regions - Europe, North America, Japan declined by a percentage point. At the start of 2020, it was forecasted that this would be the 3rd consecutive slow growth year for the industry as conventional challenges - overcapacity, restructuring and trade frictions together with global slowdown would keep the demand and prices subdued.

 

The outbreak of Covid19, however, accelerated the slowdown process as it led to a sudden pause in all economic activities, thus making this a de-growth phase. China was under lockdown for around 8 weeks (beyond the Lunar New Year holiday) which resulted in 6.8% decline in its GDP growth for the month of February. Its industrial production dipped by 8.4% in Q1 2020 (y-o-y) while automotive sector was worst hit with 44.6% decline in production during the same period. Crude steel production was also slow and grew marginally by 1.2% during Q1 2020 (y-o-y).  Nonetheless, China began the unlock process (much sooner than the rest of the world) and was completely out of the lockdown by the end of April. Hence, all major construction and industrial activities were back in business and are now operating at close to full capacity. Nonetheless, there is no major fresh steel demand as currently most industries in China are consuming the inventory piled up during the lockdown period. Hence, despite most economic activities in China having restarted, still the steel demand remains minimal in the country. Further, since the rest of the world (particularly EU and the US, which are primary importers) are still in the process of releasing lockdown, the export demand is still negligible and this is expected to affect the recovery in manufacturing and automotive sector in the country. Thus, while China’s steel production has picked up, subdued export demand and inventory backup is expected to hamper the recovery in steel demand, which is forecasted to remain nominal and may increase by only 1.0% in 2020.

 

While steel demand from China is forecasted to be nominal in 2020, the demand for rest of the world is expected to be worse during the year. Though there has been no vaccine or cure for Covid19 so far, yet the world has entered the unlock phase as the elongated lockdown was proving to be economically hazardous. While most industries and factories across the globe have begun production, however, they are still operating at substantially lower than full capacity and might take a few months to reach optimum capacity.

 

The developing countries in particular, are facing a hard time during the unlock phase as well. Factors such as supply disruptions, timely availability of labour and material and low fixed assets investment is preventing smooth recovery in industrial and construction activities. Amongst ASEAN countries, Vietnam is the only country which could successfully contain the Covid spread and could begin the industrial recovery process. Hence, Vietnam is expected to witness a growth in steel demand. However, this is forecasted to be nullified by decline in demand from countries like India and Latin America, which are still struggling with supply disruptions, slow demand recovery and capital shortages. The World Steel Association (WSA) expects the steel demand in the developing countries (excluding China) to decline by 11.6% in 2020 and recover drastically by 9.2% in 2021.

 

The WSA expects even larger decline in steel demand from developed countries. While the EU and the US had already been struggling with slowdown in manufacturing sector and low investor confidence, the Covid19 outbreak amplified the situation as it led to job losses and bankruptcies resulting in difficult recovery phase. Developed countries are expected to witness a dip in their steel demand by 17.1% in 2020 but grow by 7.8% in 2021.

 

In a nutshell, developing (excluding China) and developed countries are forecasted to witness double digits decline in their steel demand as despite unlock most countries struggle to recover. However, this decline is expected to be nullified by marginal growth in China. Since it began the unlock process earlier than rest of the world, most of its industries restarted in Q2 2020 itself while rest of the world might take rest of 2020 to return to normal. Hence, while recovery from lockdown will lead to improvement in Chinese steel production and consumption, however, the global recession and effects of lockdown on rest of the world will keep its growth subtle, thereby, leading to negative to nominal growth in global steel demand. The World Steel Association also holds conservative view on steel demand forecast as in its recent release, it forecasted the global crude steel demand to fall by 6.4% to 1,654 Mt in 2020 and recover to 1,717 Mt in 2021 (3.8% y-o-y growth). Hence, though the decline phase (caused by Covid19) was quick, the recovery phase is expected to be slow and long.

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