Global steel prices likely to drop on weak offtake by China’s construction sector

Global steel demand will likely decline on weaker offtake by the Chinese construction sector, while excess supply from the Communist nation will keep the prices on a leash.

However, US research firm BMI, a unit of Fitch Solutions, said India will remain a bright spot for continued steel demand in Asia.

According to Goldman Sachs, the risk of excess steel supply in China is becoming more and more obvious and a slower recovery in property sales will likely lead to a 5 per cent drop in steel demand. As a result, Beijing might lower its production target.

Price forecast cut

Data from the World Steel Association show that steel production in China dropped 1.5 per cent in April, while it was up 4.1 per cent during January-June this year. 

“Mainland China’s construction sector remains in decline, although we expect a pick-up in H2 2023. At the global level, demand is likely to be subdued throughout the year as major economies experience an economic slowdown,” said BMI, a research unit of Fitch Solutions, in a downgrade of its price forecast.

The research unit said it has cut its average price forecast for steel to $730 a tonne from $825 earlier due to lacklustre demand dynamics.

The global average price for longs and flats has averaged $751 in the year-to-date as of June 6, while the current average stands at $713/tonne. Steel prices are down 15-20 per cent year-on-year.

Slower-than-expected growth

The Australian Office of Chief Economist said in its resources and energy quarterly that the global economic slowdown is expected to persist this year. 

“However, a reopening of the Chinese economy — following the easing of Covid-related restrictions — should help to bolster world steel demand,” the office said. 

ING Think, the financial and economic analysis wing of multinational financial services firm ING, said the growth in the Chinese construction sector, which accounts for about half of  its steel demand, has been slower than anticipated. 

“New property starts in March were down 29.1 per cent compared with the same period the previous year,” it said. 

Steel consumption in China has disappointed during what is normally a peak construction season in the country. March and April are the usual peak production period for the Chinese steel market, ING Think said.

Global steel consumption is forecast to grow 1.6 per cent in 2023, the Australian Office of the Chief Economist said. 

India’s 2023-24 Budget

BMI said the Indian Budget for the current fiscal has “multiple infrastructure plans: from rails, roads to airports to spur economic growth”. 

“In the near term, the government plans to begin 100 airport projects by the end of 2024. The Airports Authority of India has a targeted capital outlay of $13 billion for construction of greenfield airports and terminals, runways and other activities. These infrastructure plans will require a substantial amount of steel, with most of it expected to come from domestic production plants,” it said.

BMI said despite a modest recovery in Mainland Chinese steel prices in H2 2023, prices are likely to remain depressed in other major markets, placing a lid on the global average.

Ukraine war impact

On the supply side, the research unit said it expects limited production growth in 2023 as major steel-making firms continue to face high input costs. 

“Over the long term, we maintain our view for global steel prices to remain on a downward trend…” it said.

BMI said in major developed markets, tight financial conditions and mounting inflationary pressures will continue to hinder growth. 

“The ongoing conflict between Russia and Ukraine is expected to persist, further impacting the overall economic outlook of the European Union and placing a constraint on steel demand and thus prices,” it said. 

Growth growth forecast

But the global average will likely pick up in the coming months from current levels, driven mainly by the bottoming out of Mainland China’s construction sector that is anticipated before the year-end. “Despite a recovery in the Mainland Chinese economy, physical demand for metals including steel has been tepid at best as growth is being led by the service sector,” it said.

BMI said its Macro team has forecast a deceleration in global growth from 3.1 per cent in 2022 to 2.1 per cent in 2023.

“On the global supply side, subdued production and reduced steel mill operations will create a floor for steel prices in 2023,” it said.

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