Short Range Outlook : May 2020

Impact of Covid-19 starts to hit home across the global long steel market

The supply and demand situation in the global long steel products market has deteriorated as global economies are doing much worse today thanks to protectionist measures and the Covid-19 pandemic. There is oversupply of almost everything, except those items that suddenly end up being in short supply due to impacts on the supply chain. This does not include ‘shortages’ that are due to consumers not being able to afford the asking price and preferring not to buy at all.

More output cuts possible in May

Many mills were able to manage the situation in April thanks to orders received in February, although lots of them reduced output. We may see more output cuts in May as the lockdowns will probably continue until June. The negative impact of the lockdowns on the overall economy should also be felt by the steel industry.

Situation in Brazil deteriorates

In Brazil, the situation has gotten worse because the main markets like the US and the EU are still in the middle of the crisis. Brazilian mills are operating at only 41 percent of capacity and the drop in April sales will be 50 percent, according to IABR. Also, the steel sales forecast for the second quarter is for a drop of 40 percent compared to the first quarter, while a drop of 20 percent in sales may be seen this year compared with 2019.

Depression highly likely in EU following lockdown

The supply and demand situation has worsened in the EU, also as demand for EU products is declining since a majority of the world economies are on lockdown. It is highly likely that the EU will experience a depression after the lockdown and that many insolvencies will be observed as banks and credit insurance companies are not able or not willing to support the needs of the economy by lending cheap money and maintaining coverage limits. On the contrary, the majority of them have already started to cut back to protect themselves. Unemployment in the EU may reach the levels seen back in 2008 and 2009.

US also faces worsening crisis, steel pipe and oil tool segment hit hardest

The situation is worse also in the US market. There are too many suppliers willing to sell even at cost level in order to carry on, even though there are not many opportunities left. Domestic prices are similar to the prices of imports from Mexico or Canada and cheaper than those from the countries subject to Section 232 duties. Although construction projects are considered essential, states in the northeast have mostly been closed. Construction in the US was slow in April and it looks like May will see only a minor improvement. Credit insurance companies were faster than any of their users in cancelling or reducing credit insurance for all steel-related companies, thus adding fuel to the fire. Oil prices have sunk to historic lows, creating a serious negative outlook for the whole steel pipe and oil tool manufacturing industry. Many companies are expected to downsize or to become insolvent in the US oil-producing states, particularly in Texas. This will negatively affect commercial building, housing construction and even auto manufacturing in the US.

Scrap-based steel segment seems to have fared better during the crisis

Scrap-based steel industries seem to have fared better during the crisis. Blast furnaces have in many cases been idle as a result of the closures of the automotive sector in Europe and the US. Long steel production has been continuing at relatively decent rates. Scrap availability has been heavily reduced during the lockdown period. The markets held up somewhat in April as a result of lower raw material availability and the backlog of orders. May will see low industrial activity and possibly limited demand for finished products. This could be mitigated by Europe and the US reopening gradually in May.

Signs in some regions that markets could reopen sooner than expected

When we see the end of the Covid-19 pandemic, we will see more demand and an increase in business activities that might boost market conditions. There are signs in some regions that the markets could be open sooner than expected. The Far Eastern markets seem to be getting back to normal. It is also a good sign that people in Western countries may be back out on the streets by June or July. Governments will surely focus harder than ever on how to stimulate their economies. China opening up and stimulus activities throughout the world will buoy the markets for some time when the reopening takes place.

China is recovering rapidly, mainly in construction, active in billet imports

China is recovering rapidly, mainly in the construction sector, which is boosting the demand for rebar and billet. Chinese steel exports are still under control. In fact, Chinese companies are active in the market importing billets.

Construction in EU could be a focus for economic stimulus

The construction industry in the EU is still doing fine and it may be a target industry if the EU or individual European governments want to stimulate the economy. Domestic production both in the EU and the US has been reduced due to the temporary closure of some steel mills. This may help stop the further erosion of prices.

Long products perform better than flat products

Long products are faring better than flat products. In fact, the market circumstances were not bad between October 2019 and April 2020. The volumes are the problem for the time being.

Competition depends very much on the region, tough for producers

Competition in the market depends very much on the region and from which angle we view competition. From the producers’ point of view, competition is tough since demand is low and almost all producers are after what is available in the market. Thus, competition is still high since the buying regions are so limited. In fact, the only active market is China, which is importing semi-finished products. But from a general perspective, there is not much competition for the amount of global trade.  For instance, the level of competition within the EU market is declining, with closed borders even inside the EU, and very high transport costs from certain regions. Also, there is much more protectionism preventing imports anyway.

Outlook for the next quarter may be described as unstable

The current status of the market can still be described as unstable and unpredictable. Steel producers will probably recover quicker than demand, which may put pressure on pricing in the market. Hence, the outlook for the next quarter may also be described as unstable taking into consideration the lack of demand and low prices, even though at the same time the outlook is for an improvement on the current situation.

International business may be further restricted by additional protectionism

The world may be restricted even more as far as international business is concerned. We may see more protectionist decisions. The European Commission is already considering lowering the quotas for steel imports. Every country will try to protect what is theirs, meaning tougher protectionist measures. Exporters will feel more pressure with the declining international trade volumes, especially in the markets dominated by Russian suppliers who have no concerns about raw material or energy prices and who have the cheapest production costs. Therefore, overcapacity will probably be more of a domestic subject rather than a global issue.



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