- China lockdown impacts demand, global raw material prices
- Russia’s cheap semis exports disrupt pricing
- Global inflation to keep demand subdued
Morning Brief: Global steel prices have corrected over the last one month after a sharp rise following the Russia-Ukraine war. Immediately after the war broke out, panic-stricken buying activity was witnessed in the markets in fear of supply shortage due to the war. This had driven prices higher.
However, it appears that steel prices are sliding now mainly because of the temporary recession in China with the re-emergence of COVID-19 but also due to the fact that Russia, one of the leading steel producers in the world that exports around 45% of its total annual production, has returned to the market after a brief gap in Mar’22.
Global inflation and high energy prices are impacting demand and the strict lockdown in China is expected to create more inflation.
China lockdown
China’s zero-COVID policy and stringent lockdown that spread across 27 provinces has had a negative impact on steel prices as manufacturing and construction activity has been affected and supply chains broken.
With Shanghai handling around a fifth of China’s port volume and China accounting for 15% of world merchandise exports, shortages of manufactured goods could intensify, adding to existing global inflationary pressures as Shanghai remains under lockdown.
China’s manufacturing purchasing managers’ index (PMI) had slipped below 50 in Mar, which signals recessionary pressures on the economy. Prices of hot-rolled steel coils (HRC), used in the manufacturing sector, have dropped sharply over the past month.
Although the South East Asian markets remained well supplied in Mar-Apr compared with the western markets due to the presence of Chinese suppliers, China’s steel exports prices have dropped in line with domestic prices. Export prices of HRC have fallen by around $100/t since the beginning of Apr and are currently at $820/t FOB China, as per SteelMint assessment on 10 May.
Chinese property developers are still grappling with a debt crisis that surfaced after the Evergrande episode last year. The majority of the Chinese population is still affected by lockdowns. The lockdowns have had a negative impact on demand and prices, with global raw material prices coming under pressure.
Australian benchmark iron ore fines (Fe62%) prices have dropped to $128/t CNF China from $153/t a month back.
Russia returns with lower offers
Russia’s return to the export market with highly-discounted offers has affected prices. Competition in the global longs market remains very regional due to trade measures. But Russian exports of cheap semi-finished steel and pig iron have been causing significant disruptions in pricing.
Russia exported 15.9 million tonnes (mnt) of semi-finished steel and 16.8 mnt of finished steel in 2021, as per SteelMint data. Around 45% of the steel production from Russia and around 75% from Ukraine are exported to other countries. According to the European Steel Association, or Eurofer, the EU imported 3.2 mnt of finished steel products from Russia in 2020 and an estimated 3.7 mnt in 2021 over and above imports of semi-finished steel. Russia was the second-largest supplier to the EU after Turkey.
Raw material prices are under pressure. The pricing premium on ferrous scrap, which was an effect of the Russian invasion of Ukraine, deteriorated during Apr, as Russian semi-finished products have been able to find destinations in Asia and Turkey via trading intermediaries, according to global industry body IREPAS. Russian ferrous materials trade at a steep discount to other suppliers, with fewer destinations available.
SteelMint assessment shows that prices of melting scrap, HMS 1&2 (80:20), fell to $485/t CNF Turkey on 13 May from $650/t in Apr.
Europe slowdown
Steel consumption in Europe could shrink by almost 2% this year as a result of soaring energy prices, ongoing disruptions to supply chains and the shock of the war in Ukraine, steel industry association Eurofer has pointed out in its latest report.
Apparent consumption is set to recover by 5.1% in 2023, but the overall evolution of steel demand remains conditional on very high uncertainty which is likely to continue to undermine demand from the steel-using sectors.
Despite the disruption from the war, the impact on European industry has been cushioned by relatively high stock levels of steel coming out of the pandemic. Steel major ArcelorMittal has recently announced that it expects steel consumption in Europe to decline by 2-4% this year because of rising inflation, compared with its previous forecast of 0-2% growth.
“Tightness on the supply side created some difficulties for customers to source steel but it is fair to expect there will be some reduction in demand,” ArcelorMittal said.
However, IREPAS has noted that mills in the EU are in a good position to maintain their prices at high levels despite lower demand and internationally weakening prices, as Turkish and Algerian imports have been out of the market since quotas expired as of early Apr.
Lack of clarity in the EU on lifting of safeguards or quota increases for some products has created confusion. There is still no signal from Brussels regarding the lifting of safeguards or increases in quota volumes for certain products. Hence, offers are expected to stay tight.
Currency devaluation, energy inflation
The war in Ukraine has created global uncertainty, which has strengthened the US dollar vis-a-vis other currencies. The USD is trading at a f`ive-year high against the EURO, for instance. This has been putting pressure on commodity and ferrous metals sectors.
Higher prices of commodities with rising devaluation of respective national currencies usually result in lowering demand for commodities across regions, eventually leading to a price correction.
Moreover, the war has driven energy prices to record highs, with the World Bank saying in its recent report that it has led to the largest commodity price shock since the 1973 oil crisis.
Before the war, the World Bank had expected 2022 to be a year of stabilisation, with energy prices rising just 2% and non-energy commodity prices falling by 2%. Now, the organisation expects energy prices to increase by 51% over the course of this year.
Energy prices have seen particularly significant increases due to the fact that Russia is a major exporter of oil and gas. Brent crude oil is now expected to average $100 per barrel in 2022, a year-on-year increase of 42%, while European natural gas prices are set to double, leaving them 10 times higher than they were in 2020.
Demand slowdown due to energy inflation has taken a toll on steel prices but prices are expected to stabilise gradually in Q3 and Q4 2022 as supplies and trade flows normalise. Key factors to watch out for in H2 2022 will be the Chinese government’s efforts to stimulate economic activity after the lockdown and its effect on raw material prices as well as the rate of recovery in global downstream steel demand amid high inflation.
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