Non-China consumption offsets China slowdown, Europe uncertain: Fitch

Steel consumption outside China in 2023 should outpace the managed decline in China by 25-35 million tonnes, mostly due to dynamic growth in India, Southeast Asia and the US, says Fitch Ratings. Despite a swift supply-side response in Europe, competition in unprotected markets is intensifying, with margins visibly coming off post-Covid peaks and set to normalise in 2023.

“Sentiment remains constructive and above mid-cycle in North America, India, Turkey and Brazil, which benefit from protective trade measures, government support for infrastructure spending and/or production cost advantages,” Fitch says in a report sent to Kallanish.

In China, steel production will again decline by a low single-digit percentage in 2023 to above 0.9 billion tonnes, but margins achieved will very much depend on demand growth in China as well as major export markets. Residential housing projects will continue to decline while growth in infrastructure projects may moderate.

“Policy uncertainties continue to cloud the sector outlook,” Fitch comments. “Strict nationwide Covid measures and tight liquidity faced by property developers remain key challenges for steel sector demand recovery. Multiple policies were issued to alleviate funding difficulties for property developers. However, the impact of these measures on property market recovery remains hard to quantify so far, as broader consumer confidence will be the deciding factor for new home purchases.”

Manufacturing activity, such as machinery, automotive and appliances, will continue to grow in 2023 backed by favourable policy support, but this is unlikely to be sufficient to offset the slowdown in construction activities.

Chinese mill margins should improve from 2022 levels as many companies were suffering losses during the third quarter. Any incremental deterioration in margin level would likely result in further production cuts, Fitch says.

In Europe, the outlook for steel companies remains weak, clouded by high and volatile energy costs, waning GDP growth and consumer confidence. Also weighing is the relatively greater need to re-draw supply chains for the steel sector and possibly its end-markets, due to the Ukraine war impact.

European production was curtailed to balance supply with demand but, for now, ample supply remains available to the market. “Stocks are normal to high and there is little prospect of buying for inventory, meaning order books will not receive a boost from restocking,” Fitch says. Steel consumption should rebound slightly in 2023 but uncertainties remain around consumer confidence, inflation and the macro backdrop.

Many steel mills are still benefiting from contracted volumes for 2022, meaning reporting for the full year is likely to reveal robust earnings. “However, orderbooks are running off and prevailing (spot) Ebitda margins will lead earnings to rebase to lower levels in 2023. In addition, countries less affected by the energy crisis compete for European volumes, which will contain prices at lower levels for some time,” Fitch concludes.

Adam Smith Poland