COVID-19 impact on steel commodity markets
What's been happening in the steel industry since the beginning of the year?
In January and February 2020, global crude steel production was 293.4 Mt, an increase of 2.6 Mt (+1.1%) over the same period in 2019. China increased production by 4.7 Mt, while production in the rest of the world contracted by 2.1 Mt. The decreases were seen mainly in Europe–Germany, Spain, Poland, and Belgium.
The March 2020 production numbers, just released by the World Steel Association (WSA), reveal an estimated year-over-year contraction of 6%, with further revisions likely in the future.
This elevated level of steel production resulted in larger than normal inventory levels just as the economic impacts of COVID-19 began to take hold.
A repeat of the 2009 global financial crisis is unlikely
Will the recovery be V- or U-shaped, or will it be L-shaped, meaning resetting to a new low normal?
Unlike 2009, we aren't dealing with toxic debts in the global financial systems which leave a long-lasting footprint in the economy requiring corrective measures that take years to deliver. In response to COVID-19, we're deliberately shutting down productive sectors of the economy temporarily to slow the spread of the pandemic.
On the other hand, the effects of the 2009 crash were more asymmetric. North America and Europe were at the epicenters while China, India, and the Middle East were less impacted (relatively). The COVID-19 crisis has affected most countries around the world with comparable intensity.
The biggest change during this crisis has been the different reactions of governments–lessons have been learned since 2009. Governments have been very proactive with policy responses to manage the potential economic consequences. They've been quick to establish fiscal stimuluses, interests rate cuts, business interruption interest-free loans, and tax deferrals. In total, governments in developed economies have committed to $5 trillion dollars in fiscal stimulus which amounts to 5.4% of global GDP.
On the balance, we could expect a V-shaped recovery to take place starting from the end of the year or into early 2021.
China's recovery from the crisis is very positive for the steel industry
Given elevated production levels in January and February, most major blast furnace and basic oxygen furnace producers are not expected to return to normalcy before June, until the accumulated inventory gets drawn down. Electric arc furnace producers who were struggling with low margins before the crisis could have an extended period of shutdowns until margins and demand improve.
Fortunately, when it comes to demand, there are emerging green shoots of recovery in China, the biggest driver of steel industry demand in the world. Shipbuilding is back to 90% production levels. State infrastructure projects have been mandated by the government to return to pre-crisis levels of activity. The automotive industry has increased to 30%+ production levels. Production will increase as the lockdown is lifted in Hubei, a province with over a hundred auto supply chain manufacturers. A stimulus program from the Chinese government is nearly certain–though a repeat of the magnitude of the 2009 stimulus with large-scale investments in power, ports, urban transport, and bridges is less likely.
While China ramps up, its manufacturing supply chain will struggle to export components and products for the duration of the lag in economic recovery across the rest of the world. But the speed with which the country is returning to normalcy paired with the flattening infection curves we're beginning to see across Europe and North America bodes well for the future of steel.
What the steel industry must do to handle short-term challenges while positioning itself for long-term success
In the short term, it's back to basics for the industry. Cost reduction, improving utilization and margins, and maintaining cash flow will be the immediate focus. Large capital projects will need to be curtailed or scaled down temporarily to conserve cash.
In the long term, governments will play a much bigger role and have a larger impact on the future of the industry. They're already the lender-of-last-resort and employer-of-last-resort. They typically spend on infrastructure stimulus packages during such crises, helping to keep necessary industries like steel running. In addition to that mid-crisis response, we may also see longer-term responses such as accelerating investments in planned decarbonization, which would provide a significant boost to steel demand.
The industry must continue to remain vigilant against predatory imports. There will be no shortage of steel cargoes competing for buyers. History provides enough evidence to show the long-term damage that this can do the steel industry.
A crisis can also provide surprising upsides. The steel industry struggled with low margins in 2019 and will likely continue to do so this year. Because of this it's possible that some viable and longer-term profitable assets could come up for mergers and acquisitions. The industry must be ready to look at these opportunities and move forward if there is value.
There is also a strong possibility of reshoring manufacturing away from traditional low-cost geographies to shorten the supply chain and reduce future disruption risks. Sufficient political will, followed by legislation could accelerate reshoring to developed countries. The steel industry must be ready to respond and coordinate to accelerate this process.
Light at the end of the tunnel
The COVID-19 pandemic is presenting a fair few short-term challenges to the steel industry. The quickening recovery in China and large scale government stimulus indicates that the industry should be able to weather this storm. Producers should ready themselves to take advantage of emerging opportunities.