- Demand rebound likely from Q3CY23
- Inflation may ease to 8.1% in Euro area in 2022, and 5.5% in CY23
- Recession expected between Q4CY22 and Q1CY23
Morning Brief: Europe is likely to suffer a crude steel production loss of around 4% in 2022 on account of mill closures. This was stated by Alessandro Sciamarelli, Director, Economic and Market Analysis Department, Eurofer, the European Steel Association. He was speaking on the topic, ‘Europe’s steel production cuts – what do these mean for the world?’ at SteelMint’s recently-concluded Engage 3.0 webinar series.
For 2023 it is yet to be quantified. However, if demand conditions improve by Q3 of 2023, supply side will also gradually develop, he said.
“In the wake of the uncertainty due to the ongoing Ukraine war, energy cost and of course, inflation, we may reasonably say that mills in Europe can cater to the increasing demand in Q3 of 2023. We have already seen that during the post-Covid demand rebound, where mills were able to meet the requirements quite successfully. The same can happen now, if things don’t get worse in the next few months,” he explained.
He further said the restocking expected in Europe ahead of winter did not happen and may take place in Q2 of 2023. Restocking happened in H1 of 2021 which ended in early 2022, reflecting worst market conditions.
Sciamarelli said there is a similar decline in apparent consumption as in production. Apparent steel consumption had dropped -5.2% in 2019 due to trade issues and manufacturing downturn, and in 2020 by -10.7% (because of Covid). A rebound of 11% was seen in 2021 but recessions are expected in 2022 (-3.5%) and 2023 (-1.9%). There was an evident downturn before the onset of the pandemic. Recovery did happen since Q3CY20 throughout 2021 but drop is expected from Q3CY20 to Q2CY23.
Till January-September 2022, the EU-27’s crude steel production was at 105.8 mnt, a drop of over 8% y-o-y, as per worldsteel.
EU likely to be in recession in Q3 & Q4
The European Union’s growth has been slowing down since Q3CY21 due to continued downside factors like supply chain issues, energy prices and very high inflation. Monetary tightening, Chinese slowdown and the ongoing war in Ukraine have further slashed GDP growth prospects for all advanced economies.
“The US is technically in recession in Q2CY22. The EU likely to be in recession in Q3 and Q4, but for the entire 2022 recession is ruled out,” Sciamarelli inferred.
As per the IMF, the EU will grow +0.5% in 2023, Germany will have a setback by -0.3%, and Italy, -0.2%.
Will inflation ease?
Inflation has reached highs unseen since 1985 as a result of the rise in energy prices and severe supply chain issues (10% in the euro area in September 2022, 10.9% in Germany).
“Inflation might ease over the next months though the latest European Commission forecast for 2022 is 8.3%,” Sciamarelli said, adding, “the ECB says 8.1% in the Euro area in 2022, and 5.5% in 2023.”
Energy inflation in September in the Euro area was 41%. Gas prices have risen by 20 times compared to 2021, then have dropped by -70% compared to the August peak.
The hike in natural gas prices in the EU since end-2021 has been much higher than in the US.
No action yet on energy inflation
Higher gas prices would increase production cost of all energy-intensive industries in the continent, Sciamarelli said.
“Not only the steel sector but all other energy-intensive industries in Europe will face this huge challenge owing to high energy prices, especially natural gas. Although, there has been a reduction of 70% in the energy prices, it is still costly! Much would depend on the ongoing Russia-Ukraine war, so it is quite uncertain how things will shape up in next few months,” Sciamarelli observed.
Asked if there has been any response to the European Steel Association’s lobbying with the EU on high energy costs, Sciamarelli highlighted the need for an urgent action which is yet to come. Moreover, the EU should come as a single buyer or a single policy action should be taken rather than any country-specific solution, he said. Of late, it has been noticed that nations like Germany and Spain have taken some measures or are mulling further actions to cope with high energy costs.
“The European Commission has discussed this issue; there have been suggestions like whether any reduction can be made in consumption of households or industries. A possible price cap on the import of Russian gas was also discussed. However, the EU Council has to decide on the possible action on the issue where the EU Commission can only make proposals,” he informed underscoring the EU’s complex legislation process for this delay in arriving at a solution.
Energy crisis of 2022 most serious ever
The 2022 energy crisis is the most serious ever experienced, but its impact may be lower than previous crises, averred Sciamarelli. He reasoned that:
- In 2022, there is no economic recession though inflation is up to 8-9%.
- During the oil shock of 1973 (Yom Kippur war), crude oil prices rose six times. On average, Western economies went from a GDP growth of 5-6% to nil, inflation reached 20%.
- During the oil shock of 1979 (Iran revolution) oil prices rose from $14 to $36.
- These two energy shocks were not as big as today when natural gas in the EU has increased by 15 to 20 times, but inflation should not exceed 10%.
- Conclusion: the current energy shock is more serious than previous oil shocks but the impact on Western economies (EU in particular) could be lower: -2.5% GDP in 2023 for Germany and Italy in the worst case scenario (i.e. full cut-off of supplies of Russian gas).
Steel-using sectors
The latest leading indicators reflect the impact of severe global supply chain disruptions and energy crisis.
Orders are slowing down, and industrial output lagging behind. Industrial output remains below pre-pandemic levels in Germany and France.
Automotive output had the strongest rebound but then dropped for three consecutive quarters, with a modest rebound of 1.4% in Q2CY22. Automotive steel demand is expected to dip -1.7% in the current calendar but cover to 1.1% growth next year.
Resilience has been shown in Q2CY22 particularly in construction. This segment is forecasted to grow 5.6% in 2022 but drop -1.0% in 2023.
Steel trade balance has been negative over the last five years. Deficit has been widening further in 2021 and H1CY22.
Main challenges in 2022-2023
Confidence indicators clearly anticipate a much gloomier economic outlook. The ESI, measuring overall economic confidence in the EU, went down to the lowest level seen since October 2013. Recession is expected between Q4CY22 and Q1CY23 as a result of war and energy issues. “The macro-economic outlook is quickly getting worse: inflation will stay around current levels (the highest since 1993) in EU countries at least until the third quarter of 2022 – “technical recession” in the EU is likely in Q3 and Q4CY22. A possible improvement is expected only from Q2CY23 but subject to wide unpredictability,” Sciamarelli said.
High energy prices (natural gas in particular) are expected to stay at least up to Q1CY23 — this will make technical recession over Q3 and Q4 very likely.
Overall, 1.9% steel-weighted industrial production (SWIP) growth is expected in 2022 (thanks to positive developments in H1). Recession in 2023 (-0.9%) is likely due to the ongoing impact of war and energy prices.
Steel-using sectors’ output will be impacted in H2CY22. Improvement could be seen only in H2CY23 albeit subject to many uncertainties.
Automotive is set to remain the most vulnerable sector. It will not recover from the losses seen in 2020 (-19%) with another recession in 2022 (-1.7%). A modest rebound is expected in CY23 (+1.1%).
The construction sector (35% of steel consumption), thanks to continued public support (both at the EU and the national level), is expected to continue to prove more resilient, and is expected grow +5.6% in CY22. However, rising mortgage rates (due to policy rate hikes) are impacting housing demand and lower public support to civil engineering will result in a drop of -1% in 2023.
The overall picture, however, remains subject to unpredictable factors (possible gas rationing, energy prices etc).
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