Without an improvement in the EU’s steel demand outlook, destocking will not end

Director of Market Analysis and Economic Studies at EUROFER – about the factors affecting apparent steel consumption and steel-using sectors in the European Union

In the third quarter of 2022, apparent steel consumption in the EU reached its lowest level since the post-pandemic peak period. According to EUROFER’s latest report, it dropped by 11.2%, recording a volume of 32.2 million tonnes. Further decreases are also expected in the fourth quarter of last year and at least until the first half of this year.

As a result, apparent steel consumption in the EU is projected to decline to 144 million tonnes (-4.6%) in 2022 and 141 million tonnes (-1.6%) in 2023. A modest recovery is forecast for 2024, when apparent steel consumption may increase by 1.6% to 143 million tonnes. However, there is still a high degree of uncertainty for the future situation.

Alessandro Sciamarelli, Director of Market Analysis and Economic Studies at EUROFER, told GMK Center about the factors affecting apparent steel consumption and steel-using sectors in the European Union.

Steel-using sectors marked the seventh year-on-year quarterly growth in Q3’22. Why have they displayed resilience?

– The main reason for steel-using sectors’ resilience is the construction sector performance: in Q3 2022, it continued to be quite positive together with other, albeit relatively less important, steel-using sectors. It is important to remind that construction accounts for 35% of apparent steel consumption in the EU.

In the previous quarters, construction was heavily boosted by public support and other generous national schemes supporting both public construction spending and housing renovation as well as eco-efficiency, such as in Italy. However, these effects are now slightly fading away.

The automotive sector also had a strong rebound in output in Q3 2022 (+20.7% year-on-year), but almost entirely due to the comparison with the very low levels seen one year earlier and throughout 2021. Therefore, automotive output remains around low levels in historical terms.

According to EUROFER, the war in Ukraine has had a limited impact on output in these sectors so far. But a worsening of the situation is expected for Q4’22. What is the reason for it?

– Russia’s war in Ukraine started one year ago, but its effects were not immediately visible: in Q1 2022 the industrial cycle in the EU was still in an upswing as a carry-over of the positive trend seen in 2021. It is only starting from Q3 2022 that the war’s impact on EU industrial output became visible, notably due to an unprecedented rise in energy prices – gas prices in particular –, which peaked in July/August 2022. The protracted impact of the war in Ukraine and continued high energy prices (albeit much lower than the unprecedented spike seen over the summer) have started to spread their effects from Q3 2022, and are expected to persist to a larger extent in Q4 2022 and Q1 2023.

Real steel consumption in the EU should grow by 1.3% in 2022. Earlier you predicted an increase of 0.7%. What motivated you to improve the forecast?

– This data may be interpreted as a consequence of a more upbeat perspective, but the opposite is true. The 2022 real steel consumption increase is the result of a more pronounced-than-expected de-stocking throughout the year, due to a worsened demand outlook. Stocks have been depleted because they anticipated a pessimistic outlook in demand. Subsequently, those former stocks were passed on to real consumption, which inevitably increased. This dynamic is also confirmed by the SWIP index, which shows a stronger-than-expected steel-using sectors’ output for 2022 (+2.1%).

EUROFER expects that the real steel consumption in the EU will drop by 5.4% in Q2’23. Why should it decrease?

– We see here the consequences of the same dynamic. As long as the demand outlook does not improve, the destocking process will not end nor is restocking expected to kick off again. The second quarter of this year is set to be the through of the cycle, before we can start to see an improvement in the general industrial outlook and, hence, in steel demand. This situation should be reflected in the SWIP index for 2023, for which we forecast a recession (-0.6%) at this stage.

Why do you expect the real steel consumption in the EU to increase in Q4’23 and 2024?

– In line with the expectations outlined before, some modest re-stocking is expected from Q4 23 onwards, as demand outlook should gradually improve. Real steel consumption should start to grow again once demand takes up. However, it is important to stress that we still face significant uncertainty in the current context.

EUROFER reduced the EU’s forecast for apparent steel consumption to 144 million tonnes in 2022. Why have you downgraded the forecast?

– The impact of Russia’s continued war in Ukraine coupled with high production costs on steel demand in the year 2022, particularly in Q3 and Q4 2022, is expected to be bigger than previously expected.

Why will the apparent steel consumption begin to increase in Q3’23?

– A general improvement of the industrial outlook is expected from Q2 2023, which will be reflected in steel demand from steel-using sectors. However, there is still a lot of uncertainty, and those developments are conditional on the evolution of the current geopolitical and economic context.

Why did imports of finished products in the EU drop by 5% in the 11 months of 2022?

– The evolution in EU imports in Q3 2022 reflected deteriorated demand. This is the first time we had a drop in imports since Q1 2021, whereas apparent consumption decreased for the second consecutive quarter. Moreover, growth in imports has systematically been outpacing growth in apparent consumption since Q1 2021. Therefore, in the last two years imports have increased at a much higher rate than demand. As a result, import penetration rate (i.e. the ratio of import out of demand) has continued to increase in recent quarters, reaching 26%.

What level of imports do you forecast in 2023-2024? What will supplies depend on and who will be among the main suppliers?

– EUROFER does not release any forecast on imports nor exports. However, Turkey, India, China, Taiwan and South Korea are likely to remain the five top exporters of finished steel products to the EU. As a consequence of Russia’s war in Ukraine, Taiwan and South Korea are now gradually replacing imports from Russia and Ukraine.

Exports of finished products also decreased in the 11 months of last year. What caused the fall?

– The main reason for a fall in EU exports was weaker external demand, a trend in line also with EU domestic demand. In particular, we have seen a slowdown in steel demand in the course of 2022 in some of the main EU export destinations, notably the United Kingdom and China.

What will happen to exports in 2023-2024? What will be the geography of supplies?

– We expect that in 2023 steel demand will grow more robustly in the U.S., thanks to public policies such as the IRA. The United Kingdom, Turkey, the U.S., Switzerland and China are likely to remain the key export destinations for the EU.

Yevheniia Hubina