The World Steel Association (worldsteel) expects global steel demand to contract by 6.4% this year, as a result of the Covid-19 crisis.

In its Short Range Outlook (SRO) for 2020 and 2021, released on June 4, the industry body states that steel demand is, however, expected to increase by 3.8% year-on-year in 2021.

This year’s reduction in global steel demand will be mitigated by an expected faster recovery in China than in the rest of the world, the association says, noting that the forecast assumes that most countries’ lockdown measures will continue to be eased during June and July, with physical distancing controls remaining in place, and that the major steelmaking economies do not suffer from substantial secondary waves of the pandemic.

However, commenting on the outlook, worldsteel economics committee chairperson Al Remeithi laments the “disastrous consequences” for public health, noting that this “also represents an enormous crisis for the world economy”.

He adds that there has been a general freeze in consumption owing to shutdowns and by disrupted supply chains.

Therefore, worldsteel expects steel demand to decline significantly in most countries, especially during the second quarter of the year. However, with restrictions starting to ease from May, the situation is expected to “gradually improve”, albeit slowly.

As most countries have been gradually reopening from their lockdowns since mid-May, a recovery of economic activities is expected in the third quarter.

Even though all steel-using sectors are affected by the lockdown measures, the mechanical machinery and automotive sectors are highly exposed to a prolonged demand shock, as well as to disruption in global supply chains.

The association adds that changes in working procedures in the steel-using sectors, to fulfil the requirements of physical distancing, have been carried out, and says this change in the working environment will potentially lead to lower productivity and an extended production cycle.  

The association further notes that it is possible that the decline in steel demand in most countries will be “less severe” than during the global financial crisis of 2008/9 as the consumption- and service-related sectors are less steel-intensive.

In many developed economies, steel demand was already at a low level, having not fully recovered from the financial crisis yet.

Remeithi emphasises that the forecast is presented “at a time of high uncertainty” as economies are reopening without a vaccine or cure in place, meaning that significant downside risks exist.

However, if the virus can be contained without second and third peaks of infection, and if government stimulus measures are continued, he says a “relatively quick recovery” could be on the table for the world.

REGIONAL OVERVIEW

Turning towards recovery prospects, worldsteel says that, coming out of the lockdown ahead of other countries, China’s economic recovery started in late February. Its economy is fast approaching normalisation, except for the hospitality and tourism sectors.

The deep freeze in economic activity during February resulted in a decline of 6.8% in gross domestic product (GDP) and 16.1% in fixed asset investment in the first quarter. Industrial production, meanwhile, fell by 8.4%, with the automotive sector showing the worst decline of 44.6% in the first quarter.

By the end of April, all major steel-using sectors were back to near full productivity, even though the full operation of the manufacturing sector is hindered by the collapse in export demand. Following the lifting of the lockdown in Wuhan in April, the construction sector has already reached 100% productivity.

The recovery of steel demand will be more visible in the second half of this year, the association says, noting that it will be driven by construction, especially infrastructure investment, as the government has put forward several new infrastructure initiatives.

Recovery in manufacturing will be slower owing to a severe recession in the global economy, but the automotive industry will get some support from incentive measures.

“We expect Chinese steel demand to increase by 1% in 2020. We also expect that the benefit from infrastructure projects initiated in 2020 will carry over and support steel demand in 2021.”

A substantial stimulus programme as seen in 2009 is not expected as this might work against the government’s desire to continue rebalancing the economy. However, the association says that if the global economic environment affects the recovery of the Chinese economy more profoundly, the government might need to provide a further boost to the economy, implying an upside risk to steel demand.

Steel demand in the developed economies, meanwhile, is expected to decline by 17.1% this year. Although the downturn is led by consumer and service sectors, the association says massive dislocations in spending, labour markets, and confidence are fuelling broad-based declines in steel-using sectors.

A spillover from substantial job losses and bankruptcies, weak confidence and continued social distancing measures suggest only a partial recovery of 7.8% in 2021.

European Union steel demand suffered a contraction of 5.6% in 2019 owing to the sustained manufacturing recession, the association said. According to worldsteel, the manufacturing sector, which was forecast to enter a recovery phase in early 2020, was pushed back into a deeper recession as lockdown measures led to a massive fall in orders.

The automotive sector is expected to be the worst hit, whilst the construction sector could remain relatively resilient.

In the US, Covid-19 is causing a sharp manufacturing recession, which is expected to reach its “nadir” in the second quarter. The fall in oil prices has placed additional downward pressure on energy sector investment, which was already distressed prior to the crisis.

Surging unemployment is leading to reduced income and confidence, impairing residential construction. Although non-residential construction is faring relatively better, it is expected to face a decline this year and a slight recovery in 2021.

Japanese steel demand has been weakening since the second half of 2019 and will continue to contract by double digits this year, as reduced exports and stalling investments weigh heavily on its automotive and machinery sectors, according to the association.

It explains that, despite the halt in some construction projects, construction will see a relatively small contraction owing to the continuation of public works.

In Korea, major steel-using sectors are expected to see a double-digit decline because of falling export markets and a weak domestic economy. The shipbuilding sector is expected to be the hardest hit, while the contraction in construction activity will record a milder decrease owing to public infrastructure projects.

Further, the developing economies (excluding China) are less well equipped to tackle Covid-19 than the developed economies, with inadequate health capacity leading to stricter lockdown measures in some countries.

Limited fiscal space to support the economy, a fall in commodity prices, capital flight and currency depreciation render the decline of steel demand in some developing countries as severe as that in developed economies.

As such, steel demand in the developing economies (excluding China) is expected to fall by 11.6% this year but will see a substantial recovery of 9.2% in 2021.

India has implemented the most stringent nationwide lockdown measures in the world, bringing industrial operations to a standstill, the association said, adding that construction activity was halted entirely at the end of March, and recovery is expected to remain slow owing to the slow return of labour.

Supply chain disruption coupled with slower demand recovery will hit the automotive sector hard in this region, and its machinery sector is expected to see a continued decline, with weak private investment and supply chain disruption.

However, supported by government stimulus, a recovery in construction will be led by infrastructure investment such as railways. The government’s support to rural income, as well as expected consumption related to the upcoming festive season, will help a substantial recovery of demand for consumption-driven manufacturing goods in the second half.

As a result, India is likely to face an 18% decline in steel demand this year, which will rebound by 15% in 2021.

In the first quarter, countries on South East Asia were hit hard by the lockdown in China and are subsequently experiencing extended disruptions in their supply chains and in tourism.

Despite the lockdown, some infrastructure projects are continuing, making the fall in steel demand less acute. Growth in Vietnam is foreseen thanks to the early containment of Covid-19.

In 2021, a renewed focus on infrastructure investment is expected to boost steel demand.

The Covid-19 pandemic has brought a “perfect storm” to Latin America and will undermine the prospect of any recovery in Latin American countries during 2020, the association says, explaining that Latin America is “particularly vulnerable because of its accumulated domestic structural problems, political instability and high exposure to commodity prices”.

The region is expected to see a substantial decline in steel demand in 2020 and only a weak recovery in 2021.

However, considering that the region seems to be lagging in the Covid-19 curve, the outlook may deteriorate further. The prospect of pushing forward with reform agendas and infrastructure plans is being hampered, pointing to a possible long-lasting impact from Covid-19 for the region.

In the Commonwealth of Independent States region, the association said that its economy will be slow to come out of recession. Combined with the collapse in oil prices, the Covid-19 crisis will push steel demand into a severe contraction in 2020, with a mild recovery in 2021.

The oil-producing countries in the Middle East and North Africa region are among the hardest hit owing to the double shock of the Covid-19 outbreak and the plunge in oil prices.

INDUSTRY OVERVIEW
The construction industry in some countries suffered an abrupt halt of projects owing to supply chain disruptions and a shortage of workers during the lockdown period. However, worldsteel says the decline in the construction industry will likely be less severe than during the financial crisis of 2008/9.

In the construction sector, physical distancing measures seem to be more challenging to put in place, hindering post-lockdown resumption of work. Prospects of new construction projects have also worsened owing to the deteriorated balance sheets of consumers and businesses.

Governments might try to put a focus on new construction projects in an effort to support demand, but significantly worsened government balance sheets may confine the ability to carry out public infrastructure investments, the association notes.

The mechanical machinery sector, where supply chains are some of the longest in manufacturing, has experienced significant logistical bottlenecks and supply chain issues.

At the same time, mechanical machinery will experience a substantial decline in demand in 2020 as investment projects are put on hold or cancelled, and the sector will face challenges in demand recovery in the longer term owing to a bleak outlook for investment.

However, sectors like agricultural and construction machinery will recover faster.

However, the automotive industry is the biggest victim of the Covid-19 crisis among the steel-using sectors, worldsteel laments.

This year, the automotive industry is expected to experience a loss of sales of 20% on top of the losses in the past two years, and a recovery to pre-crisis levels will take several years owing to income growth and remote working, but safety concerns might boost demand for passenger cars in the short term.

Supply disruptions may also continue beyond the lockdown period as liquidity problems will deter the restart not only of car producers, but also of auto part suppliers, meaning that the transition to electric vehicles will continue and likely accelerate post-pandemic.