Posted on 21 Apr 2020
THE steel industry, which has been clouded by oversupply and low demand for years, is bracing for more difficult times ahead as the coronavirus disease (Covid-19) pandemic rages globally without any definitive sign of subsiding soon.
The assault from the Covid-19, which has forced almost all economies to a standstill is causing industrial and commercial activities to a halt for several months now.
In Malaysia, the iron and steel industry is bracing for a massive loss of more than RM3.2bil in revenue as a result of the shutdown imposed by the government, according to the Malaysian Iron and Steel Industry Federation in a statement.Moody’s Investors Service, in a special report released on April 7, painted a bleak picture for the global steel industry.
A recovery can only be seen later this year if the economic stimulus programmes imposed by various countries show impact.
The unexpected virus pandemic, projected to bring about a global recession, exacerbates the already challenging operating environment for steel makers around the world, says Moody’s in its special report last week.
The broad macroeconomic weakness caused by the pandemic will further drive down demand for steel in core industries like manufacturing, automotive, construction, as well as oil and gas exploration.
Prior to the Covid-19 outbreak, Moody’s has already cut outlook for the steel industries in the United States (since October 2019), Europe (May 2019) and Asia (August 2019) – based on weak fundamentals.
The last major crash in steel and ferrous scrap prices was in 2015-2016, when a combination of a China stock market rout, crude oil price plunges, sovereign debt defaults in Europe and the confirmation of Brexit caused commodity prices in the metals and mining sphere to follow suit.
The key difference between the last price crash and the current one is that the 2015 crisis was not grounded in a physical virus outbreak, and was largely caused by sentiment in the financial markets.
The outbreak, hitting 200 countries, has prompted Moody’s to cut the outlook for the Russian and Brazilian steel industries to negative.
While Moody’s macroeconomic board has forecast a global economic contraction for 2020, it has also cut the GDP forecast for important steel consuming countries: for the United States, it is contraction of 2%; euroarea negative 2.2%, China 3.3%, Brazil negative 1.6%, Russia 0.5% and Japan negative 2.4%.
In short, the fate of the steel world continues to hang in the balance: Numerous scrapyards have stopped operations, blast furnaces around the world have stopped and aggressive offers by traders for Russian and Indian supply have pushed prices down further.
Key customers of steel like automakers, construction and oil and gas drillers are seen struggling.
Automotive, one of the most important end markets for the steel industry, is expected to be badly-hit this year as it is seeing sales plunge.
Moody’s said global light vehicle sales will fall 14% this year, with US sales down at least 15%, Western Europe down 21%, Japan down 8%, and China down 10%.
China, the world’s largest consumer market for passenger cars, saw its March auto sales sink 48.4% year on year to 1.4 million units, after seeing February plunging by 79%.
The oil and gas sector, another important consumer of steel for drilling and pipeline development, will experience industry contraction due to plunge in oil prices and dispute over production levels, according to Moody’s.
Construction and infrastructure activities are also likely to slow further, with cancellations of projects in the horizon.
China sets the tone for supply and demand
As steel production in China accounts for more than half the world’s total output, conditions in China set the tone for producers and consumers around the world.
The China Iron and Steel Association told Financial Times in a statement: “Companies are facing restrictions in logistics and transport, trades have been muted, prices of raw materials and steel have slid, which is causing the market’s value to decline.”
The Covid-19 outbreak has also affected the supply chain of raw materials for steel.
China is the top buyer of iron ore from BHP Group (Australia), Rio Tinto Group (Britain) and Vale SA (Brazil).
But the Covid-19 pandemic’s impact on the steel industry will be concentrated in the first quarter, the Chinese group said in a statement.
“Steelmakers should appropriately adjust production schedules based on orders, finances, ability to transport materials, ” it said.
But to Wang Jianhua, chief steel analyst at Mysteel Research Institute, the peak of the fundamental pressures has yet to come.
“While China is beginning to return to work, the rise in steel demand, activity is very limited, ” he told Bloomberg in February.
Lockdowns, transport curbs and quarantine measures all threaten to hurt demand.
According China’s customs, China’s steel exports in January-March 2020 totalled 14.28 million tonnes, down 16% year on year.
Moody’s expects China’s steel demand to decline in the low single-digit percentage in 2020, because of the slower economic growth and logistic disruptions.
It notes that steel inventory in China rose sharply until mid-March as its production continued unabated, despite lower demand.
Inventory in China began to decline only in late March with the resumption of construction, it adds.
“Weak demand and high inventory are driving steel prices lower, down 6% so far this year. We expect steel demand to gradually recover as a result of Chinese government stimulus measures, especially in the infrastructure sector, and business resumptions.”
Like China, India’s steel production has its fair share of trouble due to the coronavirus.
There are reports that Indian steel companies will face even more price competition from rivals in China during this unexpected crisis.
On March 20, Beijing raised export rebates on the primary infrastructure alloy by 30% to help cushion the impact of demand destruction at home and overseas.
The move by China to increase export rebates on cold-rolled steel, stainless steel strip and others from the present 10% to 13% for a large number of steel products may prompt some Indian steel producers to seek higher border tariffs from the Indian government if imports from China were to surge.The Indian Steel Association said the impact on pricing will also depend on the inventory pile-up in China.
One of India’s largest steel makers, Tata Steel, had decided to shutter its downstream standalone units in the Maharashtra and Uttar Pradesh provinces, although its main plants at Jamshedpur, Kaliganagar and Angul remain operational, the Business Standard reported.
Tata Steel’s consolidated crude steel production capacity is at 19.6 million tonnes.
Curbs on manufacturing and the clampdown on logistics had started taking their toll on steel operations, according to media reports.
India’s Ministry of Steel has directed steel mills to continue operations after some state governments sought to restrict steel production due to the Covid-19 lockdown.
Under the Indian Essential Services Maintenance Act of 1981, businesses “dealing with the production, supply or distribution of coal, power, steel or fertilisers” are deemed as essential services.
And like other countries, India is facing lower demand.
ArcelorMittal Nippon Steel India admitted production was impacted because of Covid-19 issues, lower demand and curtailed logistics.
The demand for steel has fallen due to the shutdowns of automobile makers. The auto sector accounts for 15% of steel usage, while construction and infrastructure around 60%.
Outlook may brighten soon
But all is not lost in 2020.
Many estimate the tide may be turning now, with number of deaths and infections seem to be tapering off in countries, under tight lockdowns and social distancing policies.
One key factor on how soon the steel sector will recover from the Covid-19 crisis depends on whether China will see a “V-shaped” recovery that Beijing is aiming for.
China has introduced very aggressive financial and commercial measures to restart its devastated economy.
“If China is able to return to its usual level of business activity, then prices will be more sustainable.
“If Chinese economic activity continues to remain weak, then another price fall will surely come, ” a ferrous scrap trader in Singapore told Metal Bulletin.
While the various Chinese economic indices are forecast to increase from March onward, it remains to be seen how much of an increase they can achieve, and whether they are sustainable for the rest of 2020.
For now, Moody’s has given a “negative” outlook for Asia.
The demand for steel in Japan will likely decline further in fiscal 2020 as its end-user industries’ face production and demand disruption with the spreading outbreak.
“In South Korea, we expect domestic and export demand will fall significantly, reflecting lower auto production and sluggish housing construction.
“In India, we expect steel consumption to grow between 2% and 2.5% in 2020, largely in line with our GDP growth forecast for the country of 2.5%, ” Moody’s adds.
In the past, the steel industry had risen from ashes of wars and other epidemics. Hence steel players believe the industry can recover from the present crisis too.
Source:The Star Online
