Recent steel market developments
Global steel demand during the third quarter of 2010 reached an annualised rate of 1.4 billion tonnes (6% higher than the pre-recession level seen during the second quarter of 2008). Production amounted to about 1,046 million tonnes during the first nine months of 2010, up by almost 20% compared to the same period in 2009.
Asian countries, particularly India and China, emerged rather quickly from the recession due to infrastructure oriented stimulus packages and strong internal demand, whereas the effect of the crisis was more adverse on the European and the NAFTA steel industry. As a result, these economies took longer to recover.
Steel demand in Asia is currently 17.6% higher than pre-recession levels. In particular, Chinese demand is about one-third above the pre-recession level. Contrary to this are developments in many developed market economies where steel consumption is still below pre-recession levels.
Regarding production, global steel output has been on an upward trend from January 2009 to May 2010, pushing up the steel capacity utilisation rate significantly. Production was up in North America and in the European Union but from a very low base. From May to September 2010, on the other hand, global steel production declined again largely due to a weakening of demand as well as temporary production cuts linked to energy measures in China. The solid upward momentum of steel consumption, driven by expanding manufacturing activity together with a strong increase in raw material prices, contributed also to higher prices although in May 2010 the world average was still 31% below the peak level witnessed in mid-2008. This upward price trend came to a halt in May 2010 when demand prospects began to moderate.
Uncertainties and challenges
Short-term steel market outlook
Prospects for economic activity in general and steel demand in particular, remain uncertain, even in the short term. Global economic recovery continues, with quarterly growth in the OECD expected to increase only gradually in 2011 and 2012 after weakening again in the second half of 2010. Growth in large emerging economies will most likely stay strong in 2011 and 2012, close to 10% per year in China, and above 8% in India. However, downside risks to the global economy remain substantial with fragile financial markets, ongoing household balance sheet deleveraging, sovereign debt problems and tensions in foreign exchange markets.
Global steel demand is expected to rise by 5.3% in 2011 according to the World Steel Association i.e. 9.6% higher than the pre-crisis peak of 2007, implying a further rise in steel output. The highest growth rates would appear in CIS economies (11.1%), followed by the Americas (9%) and Europe (5.7%). In Asia, steel demand would increase by 4.1% in 2011, with higher growth rates for India (13.5%) and South-East Asia (7.4%). Steel demand would decrease in 2011 by 1.4% in Japan and go up 2.8% in Korea. In China, steel demand would increase by 3.5% compared to an average growth rate of 13.5% during the period 2005-2010. It may be that, due to the increase in demand and continued strong raw material prices, steel prices to the consumer could be on an upward trend.
Although the overall outlook for the global steel industry remains satisfactory, growing overcapacity could endanger the economic soundness of the industry. New capacities were, and still are, being built throughout the world but in particular in countries with both low costs and high market demand. Steel capacities increased during the past decade by 814 million tonnes resulting in a world capacity close to estimated 1,893 million tonnes in 2010 of which over 300 million tonnes were in excess. In light of this, steel companies are paying continued attention to their costs of production and improving operating efficiencies inter alia via up and downstream integration as well as increasing globalisation.
Steel raw materials
A significant challenge facing the steel industry today relates to the situation in raw material markets. The global upturn in steel production has resulted in a significant tightening in the markets for steelmaking raw materials, sending prices of some key materials to historically high levels. Although raw material producers have reacted by raising output, global supplies of steel-related raw materials have come under strain partly due to the adoption of restrictive export policies in certain countries in addition to strong demand. The OECD Steel Committee will continue to discuss market mechanisms to promote adequate raw material supply to the world steel industry.
Steel trade has recovered some of the ground lost during the financial and economic crisis. The pace of recovery in trade has been most pronounced in East Asia, where Japanese and Korean exports have been increasing to meet growing demand in emerging economies in the region. Exports from the European Union have also fully recovered from the crisis, supported by demand in North Africa and the Middle East. Chinese exports, which fell sharply in 2009, are now significantly rebounding though they are still below pre-recession levels. Exports from the CIS region have recovered more slowly, reflecting still relatively subdued demand in the key European market.
The number of new trade-restrictive measures in steel appear to have abated recently. However, steel trade patterns can change rapidly and create significant challenges to fair trade for steel companies around the globe, particularly in light of continued growth in world steelmaking capacity and in case of demand slowdowns as fiscal stimulus measures recede.
The industry and the market environment are now different from that what existed only a few years back, as are government policies vis-a-vis the steel industry. Market participants have taken advantage of greater stability and better economic conditions to pursue major consolidations, taking advantage of globalization and other value-creating transactions that are literally changing the face of the global industry.
The public policy focus on the industry at the OECD and elsewhere over the last few years has taken a major step forward in identifying and exploring the causes of past downturns in steel as well as agreeing on the dangers of government subsidies and disruption of market forces in the industry. In short, the public policy focus on steel has yielded important and positive results.
Now the principal challenge for policy makers is finding the will to act on lessons learned, to discuss sources of concern before they develop into larger trade issues and to initiate forward looking policies such as pro manufacturing policies.
The iron and steel industry, which accounts for 3.9% of world carbon dioxide (CO2) emissions and 3.0% of greenhouse gas (GHG) emissions, plays a large role in climate change mitigation. CO2 emissions intensities (tonnes of CO2/tonne of crude steel) vary from plant to plant, and country-to-country, because of numerous factors, the most important being the processing routes employed and the ages and sizes of the facilities. In OECD countries, emissions trading (or cap-and-trade) is one of the policy instruments being used, or proposed, to reduce the steel industry's emissions. In non-OECD countries, closures of poorly performing plants, voluntary agreements, energy savings certificate trading and external finance take precedence. While the steel industry has achieved significant progress in energy efficiency and environmental performance, it will most likely have to face challenges to reduce its emissions and to achieve a level playing field. In the long-term, new technologies and finance will play a vital role in ensuring the sustainability of iron and steel production.