V-shape recovery expected in 2021

After continuously growing for five years in a row, global demand for finished steel will contract by 6.4% in 2020, dropping to 1,654 million tonnes (MnT) due to the COVID-19 crisis as per World Steel Association (worldsteel) in its Short Range Outlook (SRO) released in June 2020.

The Brussels, Belgium-based association, in its SRO in April 2019, had forecasted that world steel demand in 2020 would reach 1,751.6 MnT. Later, in its SRO in October 2019, the numbers were revised with WSA saying that finished steel demand would reach around 1,805.7 MnT in 2020. Had the coronavirus not spread throughout the world, global demand for finished steel products would have increased by around 2.22% as per the last 2019 SRO. Amidst COVID-19 pandemic, the forecasted numbers could not be achieved and the revised numbers show a decrease of 6% in finished steel demand.

Usually, worldsteel releases its SROs twice a year, first in the month of April and the second in October. But, this year, in light of the unprecedented disruptions due to the COVID-19 pandemic, worldsteel decided not to publish its April’s SRO for steel demand. Instead, the body postponed it to a June release.

After observing the present circumstances, the largest steel body is saying that in 2021 steel demand is expected to recover to 1,717 MnT, an increase of 3.8 % over 2020 which is a ray of hope for global steel makers.

Outlook In Developed Economies

Global demand for finished steel in developed economies is lower compared to developing economies (excluding China), as per data. In 2019, global demand for finished steel in developed economies was 393.6 MnT, down by 4.9% and in 2020 it is predicted that it will further fall by 17.1% to 326.1 MnT. Although the downturn is led by the consumer and service sectors, massive dislocations in spending, labour markets and confidence are fuelling broad-based declines in steel-using sectors. A spillover from substantial job losses and bankruptcies, weak confidence and continued social distancing measures suggest only a partial recovery of 7.8% in 2021, says the SRO.

European Union steel demand suffered a contraction of 5.6% in 2019 due to the sustained manufacturing recession. The manufacturing sector, which was expected to enter a recovery phase in early 2020, was pushed back into a deeper recession as lockdown measures led to a massive fall in orders. The automotive sector is expected to be the worst hit, whilst the construction sector could remain relatively resilient.

In the United States, COVID-19 is causing a sharp manufacturing recession, which is expected to reach its nadir in the second quarter. The fall in oil prices has placed additional downward pressure on energy sector investments, which was already distressed prior to the crisis. Surging unemployment is leading to reduced income and confidence, impairing residential construction. Although non-residential construction is faring relatively better, it is expected to face a decline in 2020 and a slight recovery in 2021.

Japanese steel demand has been weakening since the second half of 2019 and will continue to contract by double digits in 2020 as reduced exports and stalling investments weigh heavily on its automotive and machinery sectors. Despite the halt in some construction projects, the sector will see a relatively small contraction due to the continuation of public works.

In Korea, major steel-using sectors are expected to see a double-digit decline because of falling export markets and a weak domestic economy.  The shipbuilding sector is expected to be the hardest hit, while the contraction in construction activity will record a milder decrease due to public infrastructure projects.

Outlook In Developing Economies (excl. China)

In developing economies (excluding China), demand for finished steel increased by 0.5% to 465.4 MnT in 2019. Moreover, it is being forecasted that demand for finished steel in developing economies (excluding China) will decrease by 11.6% to 411.3 MnT in 2020.

As per WSA, the developing economies are less well equipped to tackle COVID-19 than the developed economies, with inadequate health capacity leading to stricter lockdown measures in some countries. Factors like limited fiscal space to support the economy, a fall in commodity prices, capital flight and currency depreciation render the decline of steel demand in some developing countries as severe as that in developed economies.­

India’s Stringent Lockdown

According to worldsteel’s June SRO, India implemented the most stringent nationwide lockdown measures in the world, bringing industrial operations to a standstill. Construction activity was halted entirely at the end of March, and recovery is expected to remain tardy due to the slow return of labour. Supply chain disruptions, coupled with slower demand recovery, will hit the automotive sector hard. The machinery sector is expected to see a continued decline, with weak private investment and supply chain disruptions.

Supported by government stimulus, recovery in construction will be led by infrastructure investments such as railways. The government’s support to rural income, as well as expected consumption related to the upcoming festive season, will help a substantial recovery of demand for consumption-driven manufacturing goods in the second half. As a result, India is likely to face an 18% decline in steel demand in 2020, which will rebound by 15% in 2021.­

India 2nd Biggest Finished Steel User

India surpassed the United States in the list of top steel-using countries of 2019, as per the latest report released by worldsteel. From the past many years India was in third spot and the US in second in terms of finished steel usage. Finally, India managed to surpass the US in the list of global steel usage in 2019. Interestingly, now it is being expected that India’s finished steel usage will stay ahead of the US in the coming years.

WSA predicted that India’s finished steel usage will drop by 18% from 101.5 MnT in 2019 to 83.3 MnT in 2020. Meanwhile, the US’s finished steel usage will drop by 22.9% from 97.7 MnT in 2019 to 75.3 MnT in 2020.

Furthermore, WSA, following a V-shaped recovery pattern, forecasted that India’s finished steel usage will increase by 15% to 95.8 MnT in 2021 whereas US will grow by 5.7% reaching 79.5 MnT.­

ASEAN, CIS & MENA region

In the first quarter, the ASEAN countries (Indonesia, Malaysia, the Philippines, Thailand, Vietnam) were hit hard by the lockdown in China and are subsequently experiencing extended disruptions in their supply chains and in tourism. Despite the lockdown, some infrastructure projects are continuing, making the fall in steel demand less acute. Growth in Vietnam is foreseen thanks to the early containment of COVID-19. In 2021, a renewed focus on infrastructure investment is expected to boost steel demand.

The COVID-19 pandemic has heavily impacted Latin America and will undermine the prospect of any recovery in this region during 2020. Latin America is particularly vulnerable because of its accumulated domestic structural problems, political instability and high exposure to commodity prices. The region is expected to see a substantial decline in steel demand in 2020 and only a weak recovery in 2021. As the region seems to be lagging in the COVID-19 curve, the outlook may deteriorate further. The prospect of pushing forward with reform agendas and infrastructure plans is being hampered, pointing to a possible long-lasting impact from COVID-19 for the region.

In the CIS, the economy will be slow to come out of recession. Combined with the collapse in oil prices, the COVID-19 crisis will push steel demand into a severe contraction in 2020, with a mild recovery in 2021.

The oil-producing countries in the MENA region are among the hardest hit due to the double shock of the COVID-19 outbreak and the plunge in oil prices.­

V-shaped Recovery in 2021

In spite of observing a significant decrease in finished steel demand in 2020, the apex body believes that global demand for finished steel will recover faster in both developed and developing economies (excluding China). The association is forecasting that the demand for finished steel in 2021 will increased by 7.9% in developed economies and the recovery rate will be even faster in developing economies (excluding China) at 9.2%.

Faster Recovery In China

According to WSA’s June SRO, this year’s reduction in global steel demand will be mitigated by an expected faster recovery in China than in the rest of the world.

The forecast assumes that most countries’ lockdown measures continue to be eased during June and July, with social distancing controls remaining in place, and that the major steel-making economies do not suffer from substantial secondary waves of the pandemic.

Commenting on the outlook, Al Remeithi, Chairman of the worldsteel Economics Committee, said, “The COVID-19 crisis, with its disastrous consequences for public health, also represents an enormous crisis for the world economy. Our customers have been hit by a general freeze in consumption, by shutdowns and by disrupted supply chains. We, therefore, expect steel demand to decline significantly in most countries, especially during the second quarter. With the easing of restrictions that started in May, we expect the situation to gradually improve, but the recovery path will be slow.”

He added: “However, it is possible that the decline in steel demand in most countries will be less severe than during the global financial crisis as the consumption- and service-related sectors, which have been hit hardest, are less steel-intensive. In many developed economies, steel demand was already at a low level, having still not fully recovered from 2008.”

“Let me underscore that this forecast is presented at a time of high uncertainty. As economies are reopening without a vaccine or cure in place, significant downside risks exist. If the virus can be contained without second and third peaks, and if government stimulus measures are continued, we could see a relatively quick recovery,” he further added.

Finished Steel Demand From Construction Sector

The construction industry in some countries suffered an abrupt halt in projects due to supply chain disruptions and a shortage of workers during the lockdown period. However, the decline in the construction industry will be less severe than during the financial crisis.

In the construction sector, social distancing measures seem to be more challenging to put in place, hindering post-lockdown resumption of work. Prospects of new construction projects have also worsened due to the deteriorated balance sheets of consumers and businesses.

Governments might try to put a focus on new construction projects in an effort to support demand, but significantly worsened government balance sheets may confine the ability to carry out public infrastructure investments.

Finished Steel Demand From Mechanical Machinery Sector

The mechanical machinery sector, where supply chains are some of the longest in manufacturing, has experienced significant logistical bottlenecks and supply chain issues.

At the same time, mechanical machinery will experience a substantial decline in demand in 2020 as investment projects are put on hold or cancelled.

The sector will face challenges in demand recovery in the longer term due to a bleak outlook for investment. However, sectors like agricultural and construction machinery will recover faster.