- Inflation, China deceleration to hit global steel demand
- Global capacity additions to remain weak as demand remains elusive
- Slowdown to bend prices, but energy crisis to limit fall
- India’s steel exports to fall 40% in FY23
- Flats to see sharper correction in FY23
Morning Brief: Global steel demand is facing inflationary headwinds and production is expected to fall amid weak demand and elevated inventory levels, observed Koustav Mazumdar, Associate Director, Commodities, CRISIL Research, while speaking at the recent India Steel Conference, 2022. The conference was jointly organized in Mumbai by SteelMint and the Steel Users Federation of India (Sufi) in association with the Bombay Stock Exchange.
Global steel demand
He said that inflation and China’s deceleration will impact steel demand. He revealed, global finished steel demand is expected to fall to 1,670-1,690 million tonnes (mnt) in 2022 (1,760 mnt in 2021) and edge up to 1,700-1,730 mnt in 2023.
However, China’s share is expected to remain static over 2022-23 at around 50%. It was at 56% of 1,772 mnt in 2020, and had dipped to 53% of 1,760 mnt in 2021.
Capacity additions
Capacity additions will remain weak as demand remains elusive. Global capacity additions went up to 2,414 mnt in 2021 from 2,400 mnt in 2020. It is projected to touch 2,429 mnt in 2022 and 2,444 mnt in 2023. A moderate 30 mnt is expected to be added over 2022-23. The capacities to come up by 2023-end will be driven by India and the Middle East while China will limit its overall capacity growth with a fall in its installed base.
Factors bearing down on China’s steel market:
1. Zero-Covid policy: Its zero-Covid policy is weakening end-use demand. Key steel producing provinces like Hebei, Shandong, Jiangsu and others experienced lockdowns in 2022. Other provinces were gripped by a power crisis.
2. Real estate sector under scanner: The real estate sector has been under the scanner after it crashed earlier in the year. Real estate launches have been down since July 2021 and showed the steepest 49% drop in April 2022. Real estate construction has also been in negative territory since July 2021 and saw the sharpest 48% drop in June, 2022.
3. Crude steel production cuts: Production is 6% down y-o-y in H1CY22 amid low/negative margins. This has been aggravated by inflation, which is at over one-year high at 2.7% in July 2022, and the tight power supply scenario.
Slowdown to bend steel prices, but energy crisis to limit fall
Global HRC prices are on correction trajectory. But supply cuts and high energy prices will limit the correction. The EU’s steel output in 2021 was at around 152 mnt with a very high dependence on Russia for its natural gas and coal. As a result, when the Russia-Ukraine crisis disrupted trade flows, the EU saw HRC prices peaking to a post-war $1,650/t. However, the correction from the peak was 51%. The US saw 81 mnt of steel output in 2021. With 8% of energy imports, it was impacted moderately by the war with its post-war HRC price peaking to $1,600/t but which fell back by 50% subsequently.
India’s steel demand
India’s demand will be resilient amid global slowdown, low base and pre-election spending will lend support, said Mazumdar.
All the consuming sectors are expected to see an uptick.
a) Building and construction: With 34-36% share in overall demand, this sector is expected to ride the Pradhan Mantri Awas Yojna (PMAY) and see incremental growth of 4-6% in FY23 and 5-7% in FY24.
b) Infrastructure: With 25-27% share, infra is expected to grow 9-11% across both fiscals as spending and project executions pick up as elections near.
c) Automotive: With a share of 8-9%, will likely see 8-10% and 7-9% growth respectively in both fiscals as supply chain issues get resolved.
d) Engineering & packaging: Uptick expected on rising durables penetration and steel intensity. With 25-30% share in overall demand, both fiscals may see 6-8% growth.
FY23: Demand to be driven by construction and infra projects. H2 expected to fare better.
FY24: Lower prices to stoke demand. Impending elections to push National Infrastructure Pipeline executions.
As per CRISIL, domestic steel demand is expected to register healthy growth in fiscal 2023 and it will continue with its strong trajectory in fiscal 2024.
Exports
India’s steel exports are set to dwindle on duty imposition and semis will drive exports.
Overall exports are set to decline over 40% in FY23, Mazumar indicated.
Flats dominate the export basket. In FY22, as per CRISIL, finished flats comprised 58% of the exports basket, with semi-finished longs at 27% and finished longs at 15%.
Falling global prices have made finished steel exports unviable.
India’s steel prices cool off after 2-year rally
Price corrections were delayed because of the Russia-Ukraine conflict. But export duties resulted in quick corrections. Prices peaked in April to over INR 75,000/t levels and rebar to almost INR 73,000/t as per SteelMint’s data.
However, the key moniterables are:
- Export duty revision or removal in the short term
- China’s demand scenario
- Inflationary pressures in the European Union (EU), energy crisis and associated price differential in India
- Weather disruptions in Australia impacting coking coal prices
CRISIL projects that in FY23 flat steel prices will see a sharper correction to INR 60,000-62,000/tonne from INR 67,350/t in FY22 on account of lower raw material costs and higher availability.
Longs prices, in comparison, are expected to drop to INR 55,000-57,000/t in FY23 against INR 56,858/t in FY22 because of lower exports, and higher raw material costs. “Global energy crisis due to the Russia-Ukraine conflict and other disruptions to keep costs high,” said CRISIL’s Mazumdar. Natural gas, coal, DRI and scrap prices will stay elevated.
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