The World Steel Association has released an update of its Short Range Outlook (SRO) for 2022 and 2023. World Steel forecasts that steel demand will contract by 2.3 percent in 2022 to reach 1,796.7 Mt after increasing by 2.8 percent in 2021.
In 2023 steel demand will see a recovery of 1.0 percent to reach 1,814.7 Mt. The current forecast represents a downward revision over the earlier forecast, reflecting the repercussion of persistently high inflation and rising interest rates globally. High inflation, monetary tightening, and China’s slowdown contributed to a difficult 2022, but infrastructure demand is expected to lift 2023 steel demand slightly.
Commenting on the outlook, Máximo Vedoya, chief executivwe officer of Ternium, and chairman of the World Steel Economics Committee, said, “the global economy is affected by persisting inflation, U.S. monetary tightening, China’s economic deceleration, and the consequences of Russia’s invasion of Ukraine. High energy prices, rising interest rates, and falling confidence have led to a slowing in steel using sectors’ activities. As a result, our current forecast for global steel demand growth has been revised down compared to the previous one. The prospect for 2023 depends on the impact of tightening monetary policies and central banks’ ability to anchor inflation expectations. Particularly the EU outlook is subject to further downside risk due to the high inflation and the energy crisis that have been exacerbated by the Russia-Ukraine war.”
General
The global economic environment has deteriorated significantly in 2022 as inflation risk fully materialized along with other major headwinds, namely the Russia-Ukraine war and China’s lockdowns. The Russia-Ukraine war exacerbated the inflationary pressure that was ignited by the post-lockdown supply and demand imbalances as the war disrupted energy and food supplies and intervened with the normalization of supply chains. In particular in Europe, where dependence on Russian gas supply is high, economic activities, as well as confidence, are heavily affected by the energy crisis.
The Fed’s aggressive interest rate hikes and strong U.S. dollar are propelling recession risks in the U.S. and will have a ripple effect for the rest of the world through capital outflows in the emerging economies, increasing the financial stress of indebted countries and consumers. Rising interest rates and high inflation will affect investment and consumer spending, and will hurt steel-intensive sectors such as construction, machinery, and consumer durables.
Supply chain problems eased somewhat in 2022, but continued to constrain production activities as new disruptions have emerged. Assuming that the war will not end soon and China continues to maintain its strict COVID containment policy for the time being, supply bottlenecks will not dissipate completely, despite slowing demand.
Uncertainty remains elevated for the global economy and the balance of risks is largely skewed to the downside. Among those are the effect of monetary tightening, continuation of inflation, the direction of the Chinese economy and its COVID policy, the potential crisis of gas supply in Europe, and the aggravation of the Russian-Ukraine war with unexpected consequences.
China
The recovery of Chinese steel demand in late 2021 reversed in the second quarter of 2022 as repeated COVID lockdowns led to a drastic cooling of the Chinese economy. The slump in the property market has deepened, with investment in real estate slowing to its worst in 30 years. All major real estate market indicators are in negative territory, with floor space under construction contracting for the first time in its modern history. Despite the government’s efforts to boost the real estate market, a major turnaround is not expected since buyers’ confidence remains weak due to strict COVID measures and developer bankruptcies. Infrastructure investment is recovering owing to government measures, and will provide some support to steel demand in late 2022 and 2023. However, as long as the real estate sector remains depressed, it will be difficult for steel demand to rebound significantly.
Steel demand in China contracted by 6.6 percent in the first 8 months of 2022. For the whole year, steel demand is likely to fall by 4.0 percent with the low base effect of the second half of 2022. In 2023, new infrastructure projects and a mild recovery in the real estate market could prevent further contraction of steel demand. Steel demand in 2023 is expected to remain flat under the assumption that small new stimulus measures are to be introduced and lockdown measures will be largely removed in the later part of 2022. Significant downside risks exist if these assumptions are not met. The slowing global economy poses further downside risk for China.
Advanced economies
Steel demand recovery in developed economies saw a major setback in 2022 due to sustained inflation and lasting supply side bottlenecks. The war in Ukraine has provided further impetus to inflation and supply chain issues. In particular, the EU is facing dire economic conditions with high inflation and the energy crisis. Sentiment is dwindling and industrial activities are cooling sharply toward a decline as high energy prices are forcing factory shutdowns.
Steel demand in the EU is expected to contract by 3.5 percent in 2022. With immediate improvement in the gas supply situation not in sight, steel demand in the EU will continue to contract in 2023 with a significant downside risk in case of harsh winter weather or further disruptions to energy supplies. Financial risks stemming from high public debts and slow growth in China pose further downside risks for the EU. There are also possible long-term consequences for the structure of the economy and hence steel demand if the economic constraints continue at the current level. On the other hand, if the Russia-Ukraine war ends sooner than expected, there is an upside potential.
The sustained and strong recovery of the U.S.economy from the pandemic shock is coming to an end as the Fed pursues aggressive interest hikes to contain inflation. Manufacturing activities are expected to cool sharply thanks to the weak economic environment, strong dollar and shift of spending from goods to services. However, the automotive sector is expected to maintain the positive momentum on the back of pent-up demand and easing of supply chain constraints. The construction sector will struggle due to the easing of the housing boom and the delayed recovery of the non-residential sector on the back of rising materials cost and high interest rates. The new Infrastructure Law will however sharply boost infrastructure investment, and rising energy sector investment will support growth in steel demand despite a weakening economy. Overall, US steel demand is not expected to turn into a contraction.
The recovery of steel demand in Japan weakened as rising materials cost and labor shortages have led to construction delays. However, with the support of the non-residential construction and machinery sectors, steel demand will continue its moderate recovery in 2022. Growth in the automotive industry with easing of supply chain constraints will allow for a continued recovery of steel demand in 2023.
Both Japan and Korea face downside risks from the worsening global economic outlook as their steel using sectors have a high exposure to exports.
Steel demand in the developed world will fall by 1.7 percent and recover by 0.2 percent in 2022 and 2023 respectively, after recovering by 16.4 percent in 2021 from the pandemic dip of 12.3 percent.
Automotive
The global auto industry’s recovery continued during the first half of 2022 amid the headwinds largely related to COVID-19 restrictions in China and lingering supply chain disruptions. In the US, light vehicle production is poised for continued upward movement provided supply bottlenecks continue to ease, even as the broader manufacturing sector slows sharply. In Mexico, after a weak performance in 2021, auto production is expected to show strong growth in 2022 and 2023 on the back of the gradual alleviation of the shortages of semiconductors. In India, the momentum for passenger car production is strong and is expected to remain healthy with strong order books and improving microchip supply. In South Korea, auto production is expected to show growth as the lockdowns in China and supply chain disruptions are somewhat alleviated.
Meanwhile, in Germany and Japan, the recovery is taking place at a slower pace, with more visible improvement expected in 2023. In Russia, passenger car production plunged with weak demand and increasingly severe shortage of components.
More recently, supply chain disruptions are getting less acute, and it is expected that the situation will show further improvement in 2023. However, rising inflation and especially rising energy prices are squeezing household budgets, while rising interest rates make cars less affordable. Potential weakness on the demand side may weaken the recovery of production.
However, the production and sales of EVs have been gaining momentum, especially in China and Europe. In China, production of EVs jumped by 120.0 percent to 3.28 million units, accounting for 22.5 percent of total vehicle production in the first seven months of 2022.