Steel prices are expected to fall in 2022 as the world’s largest producer, China, has cut its output to curb the industry’s carbon emissions.
According to the US Midwest Domestic Hot-Rolled Coil (HRC) Steel (CRU) index futures traded on the Chicago Mercantile Exchange (CME), the January 2022 contract settled at $1,423 per short ton on 29 December, slightly up from $1,416 on 1 December.
The HRC futures prices have been rising throughout the year, peaking at a record high of $1,725 per short ton on 3 September. Although prices have since fallen from the peak, HRC prices have more than doubled from the $705 as of 4 January 2021.
Are you interested to learn more about the steel market trend in 2022? Read this steel price analysis to find out the latest news affecting the market and analysts’ steel price predictions.
Steel price outlook amid rising Chinese production
According to the World Steel Association’s November 2021 update, China is the world’s largest crude-steel producer, accounting for roughly 57% of the global output.
As a result of the growing Chinese steel production and exports in the past decade, which led to supply outstripping demand, steel prices came under pressure, and were in the range of $400–$450 a metric tonne, Tata Steel CEO and managing director TV Narendran told CNBC in November.
Chinese steel exports fell in 2020 because of reduced global demand related to Covid-19. According to Chinese custom data, China exported 53.67 million metric tonnes (MMT) of steel last year, down 16.5% compared to 2019.
As global economies reopened this year after the easing of lockdown measures, this led to a recovery in Chinese steel exports. China shipped 61.88MMT of steel from January–November, up by 26.7% compared to the same period in 2020.
Despite the year-on-year rebound in exports over the past 11 months, Chinese steel exports have been falling over the past seven years after hitting a high of 112.4MMT in 2015.
China became one of the most polluted countries in the world following years of breakneck industrial development with little environmental regulation. As the domestic steel industry grew to become the biggest global steel producer, the sector has also contributed significantly to China’s carbon emissions.
In 2017, the Chinese government implemented stringent environmental regulations to help reduce pollution levels in the country. As a result, strict limits on steel capacity were imposed in many provinces.
However, despite the environmental restrictions, crude steel production continued to rise in China, exceeding a billion tonnes in 2020.
Chinese steel production cut due to 2022 Winter Olympics
However, ahead of the 2022 Winter Olympics, China is expected to curtail its industrial activities to cut down smog levels in the country, just as it did ahead of the 2008 Summer Olympics in Beijing.
In the iron-ore market report published on 10 December, Yao wrote that the crude steel production cuts in the second half of 2021 have been estimated to be around 50 million tonnes.
Weaker Chinese property market to weigh on steel sector
In September 2021, the debt crisis at Evergrande – one of China’s largest property developers – emerged after the group missed repayment deadlines for its loan. Evergrande has borrowed billions to fund its growth over the years and it was struggling to keep up with interest repayment. Falling property sales in China worsened the group’s cash-flow.
The fallout from the Evergrande debt crisis would have a major impact on the Chinese economy and could lead to the collapse of the domestic property market. The group’s shares and bonds are included in funds across Asia, and any loan default from Evergrande could trigger a broader contagion affecting banks, suppliers, home-buyers and investors
The weakening Chinese property market is putting pressure on domestic steel production, as steel is used in the construction of buildings and infrastructures. Yet despite growing concern over the potential collapse of the Chinese property market, investment in the sector continued to grow.
In addition, China’s central bank, the People’s Bank of China, announced on 6 December that it will cut the reserve requirement ratio by 0.5 percentage points. The interest rate cut is “expected to support fixed-asset investment in infrastructure, transportation and telecommunications and spur economic growth”.
Despite this short-term monetary measure supporting Chinese economic growth, Yao does not think the Chinese property market will return to its past real estate boom where speculation was rife.
Decarbonisation cuts China’s steel output
Steel-making is one of the most polluting industries. “The sector is currently the largest industrial consumer of coal, which provides around 75% of its energy demand,” according to the International Energy Agency (IEA). The steel sector uses coal to make coke, a key raw material from iron ore that is used in steel production. In addition, steel-makers also use coal to power mills in the production process.
The iron and steel sectors directly emit 2.6 gigatonnes (GT) of CO2 annually, accounting for 7% of the global total emissions from the energy system, according to IEA data.
The Chinese government published its “Carbon Peak Action Plan by 2030” on 24 October. Under the plan, the government implemented energy-saving and carbon reduction policies across key industries in the power, steel, non-ferrous metals, construction materials, petrochemical and chemical sectors.
In response to the emission policy, Chinese steel mills have cut production in the fourth quarter this year. In November, Chinese crude steel output fell to 69.31MMT, down 22% compared to the same month in 2020. Production from January–November dropped to 946.4MMT, down 2.6% year-on-year.
According to industry body the World Steel Association, global steel production rose by 4.5% year-on-year to reach 1,752.5MMT in the first 11 months of 2021. China accounted for 946.4MMT of global steel production from January–November this year.
Due to the seasonal winter-heating production control and pollution-reduction measures ahead of the Winter Olympics Games, financial ratings agency Fitch Ratings expects Chinese steel production to be cut by approximately 30MMT in the first quarter of 2022.
Steel price forecast: Mixed outlook for 2022
Despite wide market expectations that Chinese steel production is likely to fall further in 2022, analysts’ steel price projections were far more positive than in the previous eight years.
TV Narendran, CEO and managing director of India’s largest steel producer, Tata Steel, told CNBC in November that he expects the long-term average HRC steel price to be more than $600 a metric tonne, up by 41% from the $400–$450 of the past eight years.
Fitch Ratings also expected HRC steel prices to fall from 2021 to average at $750/tonne in 2022 and $535/tonne over 2023–2025.
In contrast, the technical analysis by MarketClub indicated a “strong downtrend” for the HRC August 2022 contract.
When looking for steel price forecasts, it’s important to bear in mind that analysts’ predictions can be wrong. Analysts’ projections are based on making a fundamental and technical study of the commodity’s performance. Past performance is no guarantee of future results.
It is important to do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your investment portfolio and how comfortable you feel about losing money. You should never invest money that you cannot afford to lose.
Several analysts forecast HRC steel prices to fall in 2022, however, they do not expect prices to return to the lows of $400 a metric tonne because of higher production costs and lower Chinese output and exports.
However, price forecasts can be wrong and have been inaccurate in the past. Do your own research, and remember that you should never invest money you cannot afford to lose.
Steel is a key metal widely used in car manufacturing, infrastructure and construction. According to the IEA, demand for steel is expected to grow by more than a third through to 2050. The steel market is driven by supply and demand, and prices could fluctuate.
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