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OECD Steel Committee Says Global Outlook Promising but Risks Remain
added: 2011-05-18

The outlook for the global steel industry is promising, with global demand forecast to increase by an annual 6% in both 2011 and 2012, according to industry and government officials at the OECD’s Steel Committee meeting in Paris on 12-13 May 2011. But downside risks remain, including further rises in steel raw material prices, continuing sluggish growth in advanced economies and high oil prices.

Statement from Risaburo Nezu, Chairman of the OECD Steel Committee

A promising growth outlook for steel in the coming months albeit uncertainty about raw material prices and other global risk factors

Although recovery has been uneven, the world steel industry is recovering at a faster pace than many expected at the onset of the financial and economic crisis in late 2008. After a strong rebound in 2010, the recovery in global steel demand will slow this year, in line with slower growth in the world economy.

Demand recovery in many advanced economies in particular remains lacklustre. In contrast, demand in many emerging economies continues to increase steadily, supported by infrastructure investments, industrialisation and further urbanisation. This development is expected to continue with estimated demand increases of about 6% in both 2011 and 2012.

However, this trend could be called into question if prices for steel raw materials, which are available in sufficient quantities and account for around 80% of overall production costs, continue to rise. Governments and industry will have to explore policy means to ensure secure, predictable and accessible supply of steel raw materials for all steel producers.

Other global risk factors include concerns regarding financial systems of many economies, remaining sovereign risks due to high levels of public debt, sluggish growth in advanced economies and high oil prices linked to geopolitical risks in the Middle East.

Steel market developments

According to the World Steel Association, in 2010 world steel demand increased by 13.2%, supported by increasing production activity in industrial sectors. Automotive production, in particular, grew very strongly in advanced as well as developing countries. However, construction activity (where around half of the world’s steel is used) remains sluggish in many economies, dampening the pace of demand growth.

Demand in China and other emerging economies has surged above pre-crisis levels, while in many advanced countries demand has yet to fully recover to these levels.

The 2007 production peak was surpassed in 2010, with global production increasing by 15% to 1,414 million metric tonnes. Approximately half of the world’s steel output growth in 2010 occurred in Asia.

Europe and North America also contributed significantly although production levels in these regions were still below pre-crisis readings. Coinciding with these developments was an increase of the overall labour force combined with more flexible working arrangements.

The market outlook for 2011 and 2012 is moderately good. Following a slowdown in the second half of 2010, world steel output growth, led by production in China, has accelerated to nearly 10% in the first quarter of 2011, year on year. Global demand is expected to increase by approximately 6% in both years.

In China, the moderate demand growth rate of 5% expected in 2011 and 2012 is marking a turning point away from the high growth rates experienced during the last decade. Manufacturing will be the engine of demand growth in many countries, particularly in sectors such as automotive, machinery, and metal goods. However, it may take some time for key steel end-using industries to fully recover from the recession particularly in countries outside of Asia.

Indeed, if the current trend of industrial production in advanced economies is maintained, the pre-crisis peak would not likely be passed until the second half of 2012. Construction is the largest market for steel and continues to be the weakest of all the demand sectors especially in advanced economies. Even in China, construction growth should slow as government stimulus ends and efforts are made to reduce energy use and cool down the real estate sector.

While some steel mills in the North East Japan were halted, with time, Japanese steel production has almost recovered to the pre-quake level, and at present there are no major obstacles in steel supply. In the aftermath of the earthquake, production of manufactured goods fell sharply due to the disruption in supply chains. Steel-using industries such as automotive and machinery, which were seriously impacted in that early days after the earthquake and tsunami, resumed their production activities one after another.

Overall, the impact on the Japanese industry is considered to be smaller than originally feared. According to the survey conducted by METI in April, in the second half of the fiscal year 2011, the manufacturing sector is likely to return to almost the pre-quake level. Recovery may be fragile, and there is a need for careful monitoring of industrial activities. Over the longer term, reconstruction work is expected to generate additional demand for steel and thus accelerate the economic growth rate of Japan.

Investment remains high in the steel industry

The global steel industry has shown resilience to sustain investment in recent years. Capital expenditure by the industry surged between 2003 and 2008, but then fell back somewhat during the global financial crisis as cash flows weakened. However, steel companies survived the downturn sufficiently well that the financial constraints to making investment expenditures are not too severe. Sizeable investments are made, particularly in emerging economies, not only to modernise existing plants in order to lower energy consumption and produce higher-quality steels, but also to build significant new capacities. In addition, there are heavy investments to integrate backwards particularly into iron ore, to benefit from the wide gap between the iron ore price and the cost of producing this key raw material.

The investment boom has been clearly visible in the development of global steelmaking capacity, which increased from 1,185 mmt in 2003 to 1,700 mmt in 2008. In 2009-2010, capacity continued to increase to an estimated 1,893 mmt last year. Despite the current pull-back in investment, capital expenditure remains sufficiently high to contribute to annual capacity growth of 3-4% over the next two years, bringing global capacity to an expected 2,027 mmt by 2012 and leading to continued concern about growth in capacity that exceeds growth in demand.

Long-term strategies needed for securing supplies of steelmaking raw materials

Governments and the industry need to adopt viable long-term strategies to ensure the secure supply of steelmaking raw materials at reasonable costs. Recent developments in raw materials markets — especially as regards the high level and volatility of prices as well as restrictive trade policy measures adopted by some economies — are a major source of concern for governments and industry participants of the Steel Committee. Global production of some raw materials is highly concentrated, demonstrating the risk of potential supply disturbances to the steel supply chain. Export restrictions and other regulations are increasingly applied in some producer countries, including export bans, duties, and licensing requirements, usually to support downstream production of higher value-added activity such as steel.

The Committee agreed to continue discussing developments in raw material markets with an aim to provide increased transparency and to explore and encourage policies that ensure secure, predictable and accessible supply of steel raw materials to all steel producers. Increasing resource efficiency and promoting recycling in order to facilitate the use of secondary raw materials are also of major importance in this context as are trade restrictions in steel raw materials. Global steelmaking capacity growing out of line with demand, causing supply-demand imbalances in some regions continues to be a reason for concern.

The steel industry faces a formidable environmental challenge

Political aspirations in many nations for climate policy are moving towards a vision of a low carbon sustainable society in which global energy-related CO2 emissions peak by 2020 at the latest, are reduced by half by 2050 (as compared with 1990 levels) and continue to decline thereafter. The iron and steel industry, as a major CO2 emitter, is expected to play a large role in mitigating climate change.

At the same time, expected economic development during the 21st century will require ever growing amounts of steel. Participants realised that reducing emissions from steel manufacturing to levels consistent with a low-carbon economy cannot be accomplished with today's technology. Governments and industry recognise the need to prepare for extraordinarily large, rapid and risky uptake of new technologies, when they become commercially available in 10-20 years. A main challenge for policy makers is to explore the policies that will be needed to encourage this longer-term transition, while simultaneously creating a level playing field among producing economies that allows the industry to compete on the basis of fundamental market-driven economic factors.

The trade environment

Global steel trade continued to recover in 2010 with exports worldwide reaching 378 million tons – up by 18% compared to 2009. This trend is expected to continue. The three main exporting economies in 2010 were Japan (11.3% of world steel exports), China (10.9%) and the European Union (8.9%). After having experienced strong declines in 2009, the EU, the United States and Korea all posted very robust growth of imports while China’s imports declined moderately. During the first two months of 2011, steel exports were up compared to the same period last year in most of the main exporting economies, with the strongest growth rates in Brazil, Korea and, in recent months, China.

The steel trade policy environment has remained relatively supportive of an open steel market worldwide. Some trade and trade-related measures have nevertheless been applied to steel such as import taxes, import valuation procedures, differential VAT rebates, and import licensing systems, in addition to the use of trade remedies. While the use of trade remedies has not reached the levels seen in previous market downturns, there are still concerns about unfair trade. However, the product composition of trade appears to be changing, as steel makers in some economies move rapidly up the steel value chain, creating challenges for steel producers in other economies.

Source: OECD

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