Cover story№ 2 November 2018
Demand for steel
Steel demand growth rates are set for a dramatic slowdown. As reported by the EIU, consumption grew by 3.6% last year to 1657 million tonnes. Growth this year is expected to be only 1.3% and the figure will drop to 0.7% in 2019, according to WSA predictions.
Steel demand in China grew by 5.2% in 2017 as producers themselves hoarded stocks, anticipating a decline in supply. The strong trend continued in the first part of this year when demand was 5.4% higher year-on-year. However, the EIU expects that Chinese consumption in the whole of 2018 will be no more than 0.5%, although this will still leave China as the world’s largest consumer of steel by far (see Figure). Huge demand for steel in China is driven mainly by infrastructure and real estate construction. The automotive industry now accounts for 10% of domestic consumption, but demand for cars is much reduced at present (car sales in China fell by almost 12% in 2017).
India remains in second place after China by volumes of steel consumption in the Asian region with 20% of the total, and a further 25% is shared by Vietnam, Indonesia, Thailand and the Philippines. The latter countries drove a 2.5% increase of overall steel demand in the region in 2017. The rate would have been higher if industrial growth in India had matched expectations and if demand from the Japanese construction industry had been stronger. Growth this year is not likely to exceed 2%, with South Korea’s programme to stimulate its domestic steel industry playing a major role.
The EIU predicts 2% growth of demand for steel in the US, Mexico and Canada in 2018, declining to 1% in 2019, significantly lower than 4.3% in 2017. The US accounts for 75% of steel demand in the region and about 43% of national consumption goes to the construction industry (AISI data for 2016). The automotive industry accounts for a further 27% of US steel consumption, but steel sales to auto makers peaked in 2016 and are now threatened by greater use of aluminium, development of alloys, and the rise of electric vehicles which are more durable than traditional cars. Both the construction and the automotive industries are threatened by loosening of US monetary policy, but demand for steel should be supported by the energy and mining sectors, which enjoyed higher prices for their outputs in 2017 than in 2016.
Growth of steel demand by 2.5% in the European region this year will be driven by the automotive industry, which represents about 20% of total regional demand, according to the EIU. But the growth rate will decline to 1.5% in 2019, which is even lower than the 2017 level of 2.3%. Demand for steel is growing faster in Central Europe due to infrastructure projects and transfer of production capacities.
The Turkish Metallurgical Association (TCUD) reports an increase in domestic demand for steel products in the first seven months of 2018: consumption grew by 4.1% to 21 million tonnes. According to TCUD, demand for long products was about 10 million tonnes (3% less than the same period of 2017), while demand for flat products increased substantially, by 11.5% to 11 million tonnes.
The Russian steel market has been sluggish in recent years, reflecting the overall slowdown of the Russian economy since 2012 and the effect of imposed and threatened sanctions. According to experts, the difficulty in accessing bank loans and foreign investments from traditional sources has made economic agents cautious about investments, and investments are an important driver of steel consumption. The economy adaptation to sanctions supported the visible consumption of steel for some time, but the recent introduction of further sanctions has slowed down this process.
According to data from the Federal Customs Service, exports of ferrous metals from Russia in January-August 2018 increased by 13% year-on-year despite the negative outlook for the external environment.
Regions close to Russia, which are relatively unaffected by the tariffs epidemic, will be most promising for exports in the medium term. The advantages of developed markets (growth in demand and higher prices) have become less pronounced, both due to economic stagnation on those markets and the introduction of duties, which make exports unattractive for Russian steelmakers. Political factors may continue to threaten export prospects in the foreseeable future.
Russian producers predict an increase in domestic demand, but it is likely to be very modest in the next two years (1.5-2.5%), again due mainly to the possible imposition of sanctions and the response of the Russian economy to the sanctions that have recently been introduced. Experts at Deloitte believe that the construction industry will continue to drive Russian demand, as in 2017 when consumption growth was fuelled by large projects, including construction of the Kerch Straight Bridge and facilities for the World Cup, as well as construction of gas pipelines. Mikhail Burmistrov, CEO of Infoline-Analytics, also sees infrastructure projects as a driver of domestic steel demand.
High demand in the long term shouldn’t be anticipated. A growth of demand around 1.8% is more realistic, but 2019 rates will be good, but lower than those expected for the current year.
Vice President, Head of the Urals Division, EVRAZ
Experts at Severstal expect domestic demand to grow by 4% this year and predict acceleration to 8% by 2021, noting that Russian Railways have increased repair work and will start work next year on a bridge over the River Ob in Siberia as part of the Northern Latitude project. MMK is also optimistic, citing the rise in oil prices, which will encourage pipeline projects.
High dependence on a limited number of domestic industries is a weakness of Russian steelmakers. Ilya Gushchin, vice president of sales Greater diversity in the domestic market for steel would greatly benefit Russian steelmakers.