The recent global rally in steel prices will be short-lived, with prices starting to decline towards the end of the first quarter of 2021, as steelmaking production continues to be restarted.

Vast steelmaking capacity idled during the heights of the pandemic could not be brought on line quickly enough to meet recovering steel demand and restocking, leading to the rapid rise in prices, credit rating agency Fitch Ratings says.

Up to 30% of global steelmaking capacity (excluding China) was idled or production at mills significantly reduced in response to a pandemic-induced drop in demand.

However, the recovery in automotive production and white goods manufacturing was quicker than expected when the strictest lockdown measures were lifted. The construction sector was less affected, as it was supported by government stimulus schemes in many regions.

The restarting of steel plants was not sufficiently quick to meet growing demand, while inventory levels reduced to historical lows, with restocking across the steel value chain in Europe and the US creating additional demand. Steel prices rallied in all regions in late 2020 as a result.

"However, we do not expect these levels of prices to be sustainable. Steel mills continue to restart quickly with about 30-million tonnes of hot metal capacity having come back on stream since October. Many idled mills in the US and the European Union (EU) are already in operation, although there is a time lag for production to fully ramp up.

"We expect prices to drop at some point in the first quarter to levels closer to historical through-the-cycle ranges. Steelmakers are enjoying high profit margins, with global metals business intelligence firm CRU's implied steel margin exceeding 30% in the EU and 45% in the US in January, although input costs are catching up."

Fitch notes that high raw material costs may temporarily support steel prices provided that steel demand is robust.

Further, the steel industry remains subject to various risks that could affect demand, prices and margins, including those related to the pandemic, such as a wider virus spread, slow vaccination and new strict lockdowns. Input costs will continue to affect steelmakers' profitability and cash flows.

Growing steel demand is, to a large extent, driven by a recovery in the automotive sector, but semiconductor shortage is a risk for a continuing demand recovery. Political and geopolitical developments, such as a reduction in government stimulus programmes, policies to cut emissions and trade wars, could increase pressure on the sector.