Steel prices to ease in 2022 on China's weak demand, economic slump, energy crisis
Edited by Aaron Woolner
Steel price is forecast to fall in 2022 and beyon as underperforming China’s demand, risks of recession in Europe and slowing global economic growth to depress demand.
Fitch Solutions, in its 16 September note, lowered the steel prices forecast for 2022 to $860 per tonne from a previous forecast of $980 in June. It also cut the price estimate for 2023 to $825/tonne from a forecast of $850 in June, as weaker global economic growth put greater downward pressure on prices.
China’s steel demand has significantly underperformed due to ongoing contractions in the country’s real estate sector, while an energy crisis has raised the risk of recession in Europe, the firm said. Additionally, the US Federal Reserve has kept hiking its policy rate, which has strengthened the US dollar but raised import costs for emerging markets, it said.
“Demand weakness has thus far overtaken any supply constraints from reduced mill throughput or suspensions of operations due to energy shortages in Mainland China and Europe,” the firm said.
Supply constraint to support prices
However, Fitch Solutions anticipated that a supply constraint brought on by high energy prices and the possibility of energy shortages would set a floor to prices roughly in line with current levels.
The market had also priced in disruptions to Ukraine’s steel exports following its invasion by Russia, with further limited upside from the effects of sanctions on the Russian economy.
“Though sanctions compliance and overcompliance among importers, banks and insurers have reduced the volume of Russian steel exports in the market, they have also forced exporters to discount supplies to find buyers reducing the price impact somewhat given falling domestic demand for steel in Russia and greater relative declines in global demand relative to expectations,” the firm said.
According to Fitch, Russia and Ukraine were the 5th and 12th largest steelmakers in the world, respectively. Their combined production accounted for 10% of the global steel trade.
Negative outlook on China’s steel demand
On the demand side, Fitch Solutions was becoming more negative on China’s demand outlook as stimulus over the first three quarters of the year failed to generate any demand growth.
The ongoing Covid-19 lockdowns, energy supply shortfalls and contracting property sector dragged down prices. Mortgage rate cuts in May also failed to improve mortgate issuances, which declined more than 25% year-over-year (YoY) as of July.
As of 5 September, 70 cities in China were still under lockdowns, according to Fitch Solutions.
“Though we do expect these measures to slowly be eased as they become politically untenable given their significant negative impact on consumption across the economy, lockdowns alone do not explain the depth of property market slowdown,” it said.
It reconsidered the Chinese economy’s ability to generate demand growth because investment-led growth over the last decade has necessitated an increase in debts and financial speculation without a significant increase in the consumption share of GDP.
China’s weak demand seemed to be outpacing supply constraints from steel mill suspensions and closures related to energy supply shortfalls, with steel demand lower by an average of 6% YoY for January to August. The country’s crude steel output posted “YoY declines registered by monthly data” ranging from 2.9% in March to 6.2% in August.
Weak revival of Europe demand
Steel demand in Europe slowed to 6.5% YoY in the first quarter of 2022, from 13.3% for the full year 2021, according to the European Steelmakers’ Association (Eurofer). However, consumption had contracted due to the high energy prices seen since February.
While expecting demand to return to growth in 2023, Fitch Solution expected it would be “below the pre-pandemic peak in 2018” and faced headwinds from the fiscal burden of managing the energy crisis unless Germany, in particular, “pursues a structural evolution for its economy away from export-led growth”.
Related to reducing the impact of emission from steel production, Fitch Solutions expected automakers and electronic goods producers would prefer European steel. This is due to the fact that European steel is primarily low-carbon steel produced in electric arc furnaces using scrap metal, as opposed to Chinese steel, which is produced in blast furnaces using coking coal and iron ore.
Long-term price outlook
Fitch expected global steel prices to continue to ease to $800/tonne in 2024 and $750/tonne in 2025, dropping further to $530/tonne in 2031.
“Ultimately, we expect that a combination of slowing Chinese steel consumption growth and rising global steel market protectionism prompting greater production in affected countries to loosen the market and drag prices lower in the medium term,” it said.
China’s domestic steel demand is expected to slow overall in the coming decade compared to the last as the country shifts its economy away from heavy industry and towards the service sector. This will drag down domestic steel prices in China and the global average.