Policy developments to shape global steel markets in 2020

Posted on 27 January 2020

Source: Wood Mackenzie

Chinese steel demand will likely peak this year at 890 million tonnes, a growth of 1.5%, according to Wood Mackenzie. With China responsible for half of global steel demand, Chinese government policy remains core to Wood Mackenzie’s view.

The Chinese property market remains a key area to watch. Wood Mackenzie does not expect the government to ease control of this sector, however if economic pressure rises, stimulus in this area is potentially an easy route to boost GDP and meet targets. An unexpected stimulus in property would lift steel demand and, ultimately, prices.

Aside from Chinese demand, what are the biggest trends to watch in global steel market in 2020? Alex Griffiths, Wood Mackenzie Principal Analyst, sees five key themes:

• Government environmental policy decisions taken in the EU and North America have the potential to shape steel markets for decades
• Capacity deletions in the west – expect more closures in the EU and additions in the east
• M&A and heightened corporate activity
• Many variables could support iron ore prices and steelmaking costs – alongside our view of declining steel prices, higher costs would mean tighter margins
• India – the government has big plans but has failed to deliver in the past. Could 2020 be India’s year?

Policy developments in 2020 have the potential to disrupt steel markets. Protectionism is the common theme and announcements this year may lead to increasingly regionalised steel markets in the long term.

“The European Commission will seek to get member states’ approval of its European Green Deal in 2020. The policy is unlikely to roll out until the mid-2020s but is likely to include a carbon border tax on steel imports. If approved, expect steelmakers, traders and consumers to begin tweaking long-term strategies.

“Despite launching a nationwide carbon trading system in December 2017, carbon emissions are not yet the priority for the Chinese steel industry. In 2020, air quality will remain the focus and steelmakers will be pushed to achieve ultra-low emission (ULE) standards on dust, SO2 and NOx emissions,” said Griffiths.

The USMCA trade agreement may be approved this year, which would provide upside risk to Wood Mackenzie’s forecast.

Griffiths said: “The deal will require 40% of a car’s value to be manufactured in North American facilities where salaried workers receive at least $16 an hour. The salary aspect could effectively force automakers to source steel from the US or Canada and provide a boost to steel output in those countries.”

In response to the US Section 232 tariffs on steel imports, Europe introduced safeguarding measures last year. In 2020, safeguarding measures will add to import volatility as buyers’ understanding of the rules matures.

The UK will leave the EU this year, however during the transition period that will span the whole of 2020, the terms of trade will not change. As details of the future trading relationship emerge, markets will see a response. However, Wood Mackenzie remains unconvinced that the UK’s steel industry will be prioritised during Brexit negotiations.

Wood Mackenzie expects to see steel capacity additions in the east and depletions in the west.

“In the EU, we have identified 4.6 Mtpa of capacity all but certain to idle in 2020. A further 2.1 Mtpa is at high risk of curtailment this year. Last year, more responsive EAF facilities bore the brunt of output declines. However, this year we expect hot metal production to lose out as high raw materials costs and an increasing environmental focus bite into margins. The most exposed are distressed assets or those with downstream facilities suffering curtailments.

“Turkey has capacity expansion plans this year despite subdued domestic demand and challenges in traditional export markets. Expansions hinge on government support, both directly and via increased steel demand from large-scale infrastructure projects.

“In China, returned capacity via the ongoing capacity swap scheme from previously closed facilities is likely to add more pressure to steelmaking margins.

“Expect a net increase of 18 Mtpa of steelmaking capacity this year, with 70% of that EAF based. This is likely to result in a lower capacity utilisation rate (particularly for EAFs) and therefore a lower steelmaking margin. Furthermore, if domestic demand growth cannot keep pace with capacity increases, expect China to export more steel than forecast.

“We predict a higher steel production growth this year when compared to the <2% growth experienced in 2019, however gains will remain modest,” added Griffiths.

Mergers, acquisitions and corporate activity in 2020 will make or break steel production.

Griffiths said: “The future ownership of the EU’s biggest integrated steelworks, the 11.5 Mtpa former Ilva works at Taranto in Italy will be decided this year.

“Due to the size and potential of the asset, the future ownership of Ilva – and its operating strategy -could define total EU crude steel production growth rates this year. Whomever the owner, production will continue. Threats by local government to curtail capacity further are waning but can utilisation ramp up beyond the 50% limit?”

“The acquisition of financially troubled steel mills in China by larger and more viable producers in 2019 could pave the way for greater raw material bargaining power in the future.
“In the US, Cliffs’ AK Steel acquisition shook the corporate landscape in 2019. The deal offers significant potential for operational synergies and cost savings, so should move AK Steel down the cost curve. We may see similar deals in 2020 as steelmakers look at increasing efficiency at a time where domestic steel prices are set to be relatively subdued.”

Can iron ore prices stay high and push up steelmaking costs? Wood Mackenzie’s base case outlook is for steelmaking costs to fall 5% in 2020, with lower seaborne iron ore costs the main driver.

“Seaborne iron ore prices have started the year strongly. If this continues, Asian and Western European steel mills will continue to lose competitiveness. With steel prices expected to weaken in 2020, steel producers are counting on lower raw materials costs to maintain margins.

There is no sign that the Chinese government will remove the ban on scrap or loosen controls on metallurgical coal imports. The result is Chinese steel producers’ raw materials costs will remain high, cramping China’s competitiveness in the international steel market. When combined with increasing trade protectionism and sluggish overseas demand, Chinese steel exports could decrease further,” said Griffiths.

2019 Indian steel demand was subdued due to a sluggish economy, liquidity issues, weak growth in the construction sector and declining trends in automobile sales.

“Recently, the government announced the National Infrastructure Pipeline project. This involves a huge amount of capital expenditure – US$ 1.4 trillion – over the next six years. For the fiscal year 2020-21, an investment of US$275 billion is planned in infrastructure, which is almost double the amount invested in fiscal year 2018-19 (US$140 billion).

“It’s worth noting that bullish Indian government plans have not come to fruition in the past. How much of this investment plan occurs will be key in determining whether Indian steel demand reaches its potential in 2020,” added Griffiths. 

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