~By SHUBHAM RAI
This year, the global outbreak of the Coronavirus disease (Covid-19) has impacted every segment of life. In March 2020, Covid-19 was recognised as a ‘pandemic’ by the World Health Organisation (WHO). Thereafter, the outbreak was regarded as a major destabilising threat to the global economy and its impact can be seen in all the sectors across the globe throughout the year.
But as we are nearing the end of the year, we are seeing that global steel demand is contracting by a very small margin. So, are the steel-using sectors recovering faster than other sectors? The Brussels-based World Steel Association (WSA) says that global steel demand will witness a contraction of 2.4% reaching 1,725.1 million tonnes (MnT) in 2020. In 2019, global steel consumption touched around 1,766.7 MnT.
While presenting the updated numbers in the October Short Range Outlook (SRO), the global industry organisation, whose members represent about 85% of the world’s steel production, assumes that despite the current resurgence in infections in many parts of the world, nationwide lockdowns will not be repeated. Instead, selective and targeted measures will be able to contain this second wave.
The construction, automotive and mechanical machinery sectors are the top three steel-users. Let us see how they performed during the pandemic year.
Infrastructure to Drive Construction Growth
This year, 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.
At many places, authorities ordered a complete halt in construction work in light of worker safety and to check the spread of Covid-19.
The construction sector is highly dependent on manpower. As the Covid-19 virus spread, the requirement of social distancing and isolation in certain cases affected the availability of skilled workforce required for specialised work.
“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,” said worldsteel.
“The construction sector remained more resilient to the Covid-19 shock as many governments focused on implementing public projects. Following the easing of lockdown this continued in the advanced economies, mostly driven by infrastructure investment, pent-up demand, low mortgage rates and easier access to credit,” the WSA said in its short-range outlook for 2020 and 2021.
The global steel body, in its latest report, noted that the construction sector in many emerging economies will see a double-digit contraction in 2020, notably Turkey, Mexico and Brazil, as they enter a deep recession and face financing issues. On the other hand, in China, the construction sector will rebound strongly, thanks to government stimulus measures.
The automotive industry is the biggest victim of the Covid-19 crisis among the steel-using sectors. The sector suffered dramatic consequences from the pandemic.
In April 2020, automotive production fell by -70-90% in many countries. While supply-side issues dissipated relatively quickly, post-lockdown recovery has been constrained by a slow return in demand. Global automotive production was down by -34% (y-o-y) in Q2, 2020.
Worldsteel says the automotive industry is expected to experience a loss in sales of 20% on top of the losses in the past two years.
“Recovery to pre-crisis levels will take several years due to income growth and remote working, but safety concerns might boost demand for passenger cars in the short term,” according to worldsteel.
However, in China, robust domestic demand has helped a faster recovery, but overall, from January to August, 2020, China’s motor vehicle production is still 9% below the 2019 equivalent.
In the rest of the world, the situation is much worse. In January-August, car production in Germany and the US was down by more than -30% (y-o-y). For the same comparison period, India’s passenger car production, which completely halted during the lockdown, is 46.1% below last year, the global industry body reported in its SRO.
At the same time, the industry is going through substantial restructuring with the realignment of supply chains for increased resilience, changes in urban mobility patterns along with the ongoing transition to electric vehicles (EV).
Mechanical Machinery Prospects
The mechanical machinery sector, where supply chains are some of the longest in manufacturing, has experienced significant logistical bottlenecks and supply chain issues this year.
The mechanical machinery sector experienced a substantial decline in demand in 2020 as numerous investment projects were put on hold and many of them even got cancelled.
China led the contraction of the machinery sector in Q1, 2020, which was followed by the EU, the US, and Japan in Q2. Since May, the decline in machinery output decelerated, but the industry is still contracting in most countries.
The global steel body noted that low profits and confidence are causing delays or cancellation of investment projects and making recovery of the sector beyond the initial rebound sluggish.
Exceptionally, in China, the output level during January-August, 2020 has exceeded that of 2019.
Overall, the sector was severely hit by the disruptions in supply chains and a decline in orders during the lockdown this year.
Small, Medium Enterprises to Impact Supply Chain
The global steel body said that, “In general, the steel-using sectors suffered less from the lockdown and are recovering faster than the hospitality, aviation, and entertainment sectors. A strong rebound in manufacturing will be counterbalanced with a lasting impact on the steel-using sectors’ supply chain due to small and medium-sized enterprises going bankrupt.”
Double-digit Contraction in Developed Economies
Steel demand in developed economies saw a decline of 14.4% to 336.7 MnT in 2020. In 2019, steel consumed by the developed economies was reported at around 393.4 MnT.
The green shoots of manufacturing in the developed economies, which were just sprouting from the slowdown in late 2019, lost the momentum thanks to the pandemic. Even with a strong bounce-back after the economies reopened, which has closed the gap with pre-pandemic levels, double-digit contraction over the whole year still seems unavoidable.
Pandemic Impact on Developing Economies
Developing economies (excluding. China) are expected to see a decline in steel demand by 12.3% to 408.3 MnT. In 2019, steel consumed by developing economies was around 465.8 MnT.
The pandemic’s impact differed from region to region in this space as countries here are generally less well equipped to absorb the Covid-19 shock, and the impact has been uneven, depending on the economic structure and severity of the containment measures required.
The impact has included rapidly falling domestic demand, the collapse of exports and commodity prices, and a free fall in tourism with no immediate recovery being seen.
On demand recovery, worldsteel forecasted that steel demand in developing economies (excluding China) is expected to increase by 10.6% to 451.6 MnT.
China’s Recovery Started in Feb
Coming out of the lockdown ahead of other countries, China’s economic recovery started in late February this year. Its economy was fast approaching normalisation, except for the hospitality and tourism sectors.
The deep freeze in economic activity during February resulted in a decline of 6.8% in GDP and 16.1% in fixed asset investment in the first quarter. Industrial production also fell by 8.4%, with the automotive sector showing the worst decline of 44.6% in the first quarter.
But, all major steel-using sectors were back to near full productivity by the end of April, even though the full operation of the manufacturing sector was hindered by the collapse in export demand. Following the lifting of the lockdown in Wuhan on April 8, the construction sector reached 100% productivity.
The recovery of steel demand was more visible in the second half of 2020. It was driven by construction, especially infrastructure investment, as the government has put forward several new infrastructure initiatives.
Recovery in manufacturing was slower due to a severe recession in the global economy, but the automotive industry got some support from incentive measures.
During January-August, investment in real estate was up 4.6% y-o-y, and infrastructure investment recovered to the level of last year. In August, the mechanical machinery and automotive sectors showed a y-o-y growth of 10.9% and 7.6% respectively.
As a result, the mechanical machinery sector’s output during January-August surpassed that of 2019 (+1.2%), while automotive production is still 9% below the 2019 level. With retail sales also catching up in August, the Chinese economy is rapidly approaching full normality.
China’s steel demand is expected to increase by 8% in 2020, aided by government infrastructure stimulus and a strong property market.
Pandemic Impact Differed Between Regions: Basson
The pandemic certainly had an impact on the global demand for steel. The impact was different from region to region but, overall, the latest worldsteel
Short Range Outlook, released in October, indicates a drop in steel demand on a global basis of -2.4% between 2019 and 2020. This drop is very different between different countries and regions. China, which experienced the original outbreak of the pandemic, is expected to grow well and, in steel demand, to show as much as 8% growth in 2020 – mainly because of the quick and rapid recovery of its construction sector, and in the latter part of the year, also in the automotive production sector.
Most of the other countries will show significant decline in steel demand – varying between -10% for Latin America and almost -20% for the Middle East. India is expected to show a decline in steel demand of -20% in 2020.
North America and the EU have experienced strong declines in steel demand owing to the Covid pandemic. Both regions experienced demand declines of around -15%. The EU is expected to show stronger recovery than North America, mainly because of more focused recovery support mechanisms in the EU.
-As told to Shubham Rai