In some ways, 2019 looked very similar to the year before in the world’s steel markets as momentum continued to slow from the supercharged year of 2017.
From an apparent consumption viewpoint, it was clearly another tale of contrasts between the strong and the weak. After 11 months of provisional data, we estimate that Chinese steel demand, on an apparent basis, rose by 6.9% year on year or 52 million tonnes to yet another new record level of 806.3 million tonnes. This was actually a slowdown from the year before when over the same period demand increased by 8.0% or 55.8 million tonnes.
In the rest of the world, meanwhile, apparent consumption continued to disappoint. After rising by just 1.2% or 8.9 million tonnes in the first 11 months of 2018 to 786.4 million, last year turned out to be a rare steel recession outside of China. We estimate that apparent consumption fell by 1.4% year on year to 775.7 million tonnes, a decline of 10.7 million tonnes. For the year as a whole, we predict global steel consumption will have risen by 2.6% last year to a record 1.750 billion tonnes, an increase of 43.8 million tonnes.
While tonnage changes last year were very much in line with the average recorded by the World Steel Association (Worldsteel) over the past decade, the growth rate we predict is well below average. Apparent steel consumption rose by 3.3% per year in the 10 previous years (2008-2018), outpacing the world’s industrial activity, which according to Oxford Economics’ data rose merely 2.8% per year at the same time.
Steel demand drivers
If in the past decade, global industry was propelled by steel-containing goods, what does the future bring? Does last year’s rapid slowdown and first steel recession since 2015 (outside of China) provide a leading indicator?
To help answer these questions, we need to look specifically at what drives steel demand. According to Worldsteel, there are seven key end-user industries on which to base a steel outlook. The first, accounting for 51% of usage, is construction, by far and away the significant user of steel. Mechanical engineering (such as cranes) - at 15% - leads the remaining sectors, which include automotive production (12%); metal goods, such as tools (11%); other transport, such as ships (5%); electrical equipment (generators) and domestic appliances - both 3%.
When we aggregate the economic value of these seven sectors into their shares associated with steel consumption, it is hardly surprising that over time, steel consumption does tend to track the trend in the end-use indicator, which we call steel-weighted industrial production (SWIP). Unsurprisingly, the SWIP slowed down dramatically in 2019, from a growth rate of 2.8% in 2018 to just 1.0% last year. That was the slowest rate of growth since the 2009 financial collapse and less than half the rate achieved in 2015, the last time the steel market contracted.
Looking ahead, demand momentum is predicted to accelerate. This year, the global SWIP will more than double to 2.1%, although that is the same rate recorded in 2015 and is still well below average. Momentum should continue to build, however; the SWIP is forecast to accelerate to an above-average 3.0% in 2021 before peaking at 3.1% in 2022. Thereafter, a deceleration is predicted throughout the decade but industrial activity is in all those years forecast to expand faster than this one, positively supporting steel use.
Although the outlook improves dramatically from next year, we believe momentum in steel this year will slow for a third straight year, weighed down by a more acute deceleration in China. This, in our opinion, will offset the more positive momentum expected in the rest of the world, notably in countries such as Turkey, which are forecast to benefit from a revival in construction output after a two-year depression.
Overall, we predict apparent steel consumption will rise by just 1.9% this year, down from 2.6% in 2019. Traditionally, slower growth in steel consumption has a negative impact on steel prices (see chart) and we believe this trend will continue in 2020.
Taking the example of the Chinese hot-rolled coil (HRC) export price, Fastmarkets recorded a contraction of $75 per tonne fob last year to a level below $500 per tonne on average for the first time since 2016. In line with steel demand changes, in China and for the world at large, Chinese and global steel prices began to revive in 2016 and rose spectacularly in 2017, the year steel demand rose more than 7%; more than twice the historical average.
Given the demand-pull for steel and the fact that global steelmaking capacity was being curtailed at the same time, primarily in China, our spot assessments rose by more than $130 per tonne fob in 2017. Higher prices supported bumper profits at Chinese steelmakers and further gains were recorded in 2018. But demand momentum had already begun to contract by then, so prices began to fall, especially in the second half.
Although it is rare for prices to fall over consecutive years - prior to last year, the previous occasion was four years ago - we believe that a further slowdown in steel consumption, albeit not so pronounced as last year, will put more pressure on prices. We forecast Chinese export prices will fall by another 4% - roughly $20 per tonne fob - this year, due to mills seeking to become more competitive overseas and benefit from a modest revival in the rest of the world’s consumption.
Although the big steel-consuming markets are seasonally depressed by winter weather, we anticipate purchasing orders for the stronger spring will materialize in the short term, pulling steel prices higher. This upward trend had already begun before the end of last year in key import markets such as the United States, where prices fell far harder than elsewhere (by more than 25% and $200 per net ton) in 2019, but we expect this trend to spread elsewhere. After rallying into March, we forecast that prices will correct into the second half of the year. Yet with 2021 forecast to be a much stronger year than in the recent past (see chart), we would not be surprised if prices start to revive again later this year in preparation.
This article has been written by our team of analysts at Fastmarkets, who are responsible for arguing our independent view on market developments and forecasting their future performance.