EU steel output outpacing demand despite cuts, auto restarts

European Union steelmakers need to be cautious about restarting capacity as COVID-19 lockdowns ease, as they risk producing into a demand vacuum which will intensify downwards pressure on prices, analyst and mill sources said. Although mills continue to restrict production, this is still outpacing demand across Europe, they said.

As much as 18.9 million mt of steelmaking capacity was taken offline in Europe during the market slump caused by the pandemic – more than in any other global region – and so far only pockets of production have come back on stream in countries including Italy, France and the UK, in line with restarts in the automotive and construction sectors, according to data from VTB Capital Research, S&P Global Market Intelligence (MI) and S&P Global Platts.

In Italy, the EU’s second biggest steelmaking nation with 23 million mt crude steel production last year and the first to officially restart steel production in late April/early May, mills are working at just 40-50% capacity. In Germany, the EU’s biggest steelmaker, restarts may be slower: steelmaker Thyssenkrupp said it expects a production cut of 20-30% of its capacity to last into the summer while Salzgitter plans to continue with reduced production amid a gloomy outlook for the rest of the year.

With 39.7 million mt of crude steel produced in 2019, Germany saw crude steel output fall 10% on year in Q1, with further falls likely this month as more mills put workers on reduced working hours effective early May.

“The worst contraction of the German economy since 2009 is not where the current crisis will end,” ING Economics warned Friday. “The second quarter will be more dreadful.” Germany’s economy shrank 2.2% in the first quarter, compared to the previous quarter, albeit slightly less than the overall eurozone’s 3.8% contraction in the same period, ING reports.

“Steelmakers are wisely proceeding cautiously to avoid piling more pressure on prices by increasing output at a faster pace than demand resumes,” Phillip Price, advisor to Fetch.AI’s Mettalex, a decentralized commodity exchange, told Platts. “The severe economic impact of the lockdown is only now starting to become clear. …While a gradual restart should support some improvement in demand…with national deficit forecasts at unprecedented levels, discretionary spending will likely be limited and central governments will likely have limited remaining resources in order to stimulate demand for some time to come,” he said.

“Steelmaking conversion margins remain under intense pressure and will likely be the key deciding factor for increased capacity utilization across the continent.”

Some steelmaking capacity, for instance in Poland, is widely expected not to return to the market for months.

Slow restarts in automotive, construction doubts

Steel consumption forecasts have been slashed or withdrawn and the overall economic outlook downgraded, with normal business conditions not seen returning before the third quarter. European Steel Association Eurofer said the construction industry – accounting for around half the region’s steel consumption – may perform better this year than other steel-consuming sectors. However, in the automotive sector, the second-biggest steel using sector, where performance is very tied to consumers’ disposable income levels, “it will take time before new orders will translate into new deliveries due to persistent transport and supply chain issues, which will remain in place for some time.”

Up until early May, Platts’ estimates were that the slow nature of restarts in the automotive sector – which came to an almost complete halt in the EU between late March and early April – meant that metals consumption in that sector was still around 50,000 mt/day of steel and 10,000 mt/day of aluminum lower than pre-COVID-19 levels.

Automakers including Renault and SEAT have reportedly returned to 33-40% working in Spain. However, Volkswagen was reported by the Financial Times this week to have paused production of four key models just weeks after reopening its manufacturing headquarters in Wolfsburg, due to weak demand for new cars in Europe, amid forecasts by Moody’s that global car sales would shrink by a fifth in 2020, and by as much as 30% in western Europe.

In construction, major UK firm Taylor Wimpey announced in the first week of May it is making a return to production, using PPE equipment.

At the height of the lockdown, some 65% of UK construction sites by value had closed down, but by the first week in May that figure was down to 37%, according to data provider Glenigan, reported by Construction News. Still, UK-based GMB Union said in a statement Friday it is in urgent talks with construction giant JCB in an attempt to save nearly 1,500 jobs following a fall in demand due to coronavirus.

Steel output to fall in 2020

2019 itself wasn’t a great year for European steel, with a fall in apparent steel consumption of 5.3% on a weak manufacturing sector, according to Eurofer, and record high import levels eroding prices, leading the European Commission to beef up its import safeguards system. Early forecasts indicate this year will be far worse: MI analyst Ronnie Cecil said in a May 14 webinar he expects EU crude steel production to slump 10% to 141 million mt, barely above the 139 million mt of the 2009 economic crisis.

Steel pricing under pressure

An incipient steel price recovery in Europe early in 2020 following losses last year has been cut back in no uncertain terms by the pandemic.

European finished steel prices are taking a dive due to persistent demand slumps despite ramp-up efforts by key customer markets. The hot-rolled coil EXW Ruhr price – a benchmark for flat steel and heavily affected by the auto shutdowns – decreased around 11% since the beginning of March to Eur428.50/mt ($463/mt) EXW Ruhr on Friday, according to the daily Platts TSI Northwest European HRC index. Northwestern European mills have tried to hold offer prices up and searched for buyers outside Europe, but have had to make concessions over the past weeks.

Increasingly more competitive import offers ex-Russia and Turkey for flat steel are putting additional pressure on domestic European price levels amid the demand slump.

Construction steel has also seen downward trends following weak demand, although rebar import quotas for some countries such as Turkey have been exhausted and European buyers have to look more into sourcing material domestically. Rebar prices have weakened further after intermittent price gains in late March as scrap supply tightened due to restrictions on scrap collection. While European scrap is firming again after a brief drop in late March, rebar did not follow the movement and fell since early April by 4.2% to Eur455/mt EXW NW Europe Friday, according to the weekly Platts TSI Northwest rebar assessment.

Broker expects ‘protracted’ lower demand

Ricardo Evangelista, senior analyst with online broker Activtrades, says that despite the economic restart in some European countries, “the lowered demand for metals is likely to be protracted,” keeping downward pressure on steel prices for some time. “The coronavirus fallout triggered the deepest global economic contraction since the second world war and the recovery won’t be V-shaped,” he said.

“The slowdown was too pronounced and many doubts remain, regarding the full extent of the virus impact; should we expect a second and third wave, and if so what will be their economic impact? How long before there is a vaccine or a cure? Will demand for cars and other heavy industry products go back to pre-crisis levels, in a post-COVID-19 world? Despite the lockdown easing, the future remains uncertain.”

— Diana Kinch, Laura Varriale and Annalisa Villa