Slowing steel market grapples with uncertainty

EDINBURGH/SINGAPORE/HOUSTON 1 June 2018: Global steel demand growth is now showing firm signs of slowing. In the US, government policy has started to smother the domestic market. Wood Mackenzie’s Global Steel Short-Term Outlook, released this week, shows that in Europe, signs of deceleration are becoming apparent as automotive registrations have been easing through the first quarter. As domestic demand loses momentum, automotive exports are having to play an increasingly important role in driving production. Ultimately, European automakers’ ability to offset slowing exports to the US with rising exports to China will determine the market balance.

Renate Featherstone, principal analyst, global steel markets, said: “Given the uncertainty in the global steel market, we forecast weaker steel prices across most products and regions through the third quarter of the year and into the fourth.”

She added: “On top of last night’s imposition of tariffs on imports from the EU, Canada and Mexico, a number of policies pertinent to steel demand still remain unresolved, including a Section 232 investigation into imports of automobiles and their parts.

“This adds to the uncertain policy environment in the US automotive sector, which has seen investment decisions already brought to a standstill due to protracted NAFTA negotiations and the potential revision to the CAFE emission standards.” 

Wood Mackenzie estimates that 30 Mt of steel were consumed in the US automotive sector in 2017. This is around 30% of the US’ total steel demand. This sector is not only large, it is also the sector where margins are high, due to material complexity. Therefore, over the last five years, this is where most US steelmakers have focused their investment.

Ms Featherstone said: “Theoretically, restricting vehicle imports could force up domestic vehicle production and eventually benefit US steelmakers, but such an outcome relies on a major leap of faith. In the meantime, the policy turmoil is already strangling the US domestic market.”

The American Iron and Steel Institute reports automotive steel shipments down 2.8% in Q1 and light vehicle assembly is down 1.4% year-on-year year-to-April, while domestic sales are down by 1.7% over the same period. In light of these developments, we have now lowered 2018 automotive steel demand growth to 1.1%, from 2.6% previously. This, combined with a small downwards revision in machinery and further destocking, will see 2018 steel demand rising only 4.2%. It was 7% previously.

Nevertheless, steel prices remain high at around US$1000/tonne of hot-rolled coil. The regional price spreads have remained broadly unchanged between US$300 and $330/tonne and this has continued to attract imports. Wood Mackenzie continues to forecast easing imports in the remainder of the year. Steel imports will come in at 29.5 Mt in 2018, down 6 Mt on 2017 levels. This moderate decline in imports relies on tighter import policy in H2 2018, as well as easing steel prices due to weakening demand outlook. Hot-rolled coil should remain at US$900/tonne in H2 2018.

What about Europe?

Wood Mackenzie’s forecast for European steel demand growth in automotive is strong for 2018, at 3.8%. Automotive registration growth eased in the first three months of the year, acting as a reminder that the growth expected in the domestic European market has changed gear and is now heading towards moderation.

However, exports appear to be undergoing a robust expansion, and strong economic performance in emerging economies should support EU automotive production growth.

Ms Featherstone said: “This is complicated by the Trump administration’s protectionist stance. The US’ Section 232 investigation into automotive imports increases the possibility of a reduction of European exports to the US.

“There are two points to consider, however.

“Firstly, while the US is the most important market for European exporters, its share of total external EU exports fell from 21% in 2016 to 20% in 2017. This is due in part to the weakness of US vehicle demand, but also to the growing importance of other commercial partners, notably China. Its share of external EU automotive exports rose from 8.6% in 2016 to 9.8% in 2017 and continued to expand in 2018.”

She added: “Secondly, in May China announced the reduction of import tariffs on passenger cars from 25% to 15%. This could help counter the effects of falling trade to the US, though it is difficult to imagine a role-swap between the US and China as primary partner to European exporters in the near term.”

Despite fears over US protectionism, EU steelmakers have continued to expand production, up 2% year-on-year in the year-to-April. If June prices will remain stable on May’s levels, the price adjustment we expected for Q3 has come earlier. Wood Mackenzie maintains our H2 forecast unchanged, with prices around US$690/tonne for hot-rolled coil and US$680 for rebar.

Despite the correction, steelmakers’ margins remain strong and above their medium-term average. But there is risk here. On the one hand, EU mills will be tempted to overproduce. On the other hand, high margins and high production may eventually mean higher raw-material prices.