The world steel market is currently torn between rising cost of production and softer demand for the commodity in major markets around the world. Prices have fallen; and if anything, more correction appears to be in store for the second half of the year.

Steel prices in the European Union have witnessed the most sustained fall so far. This is despite production constraints in the region due to cost pressure. Many steelmakers have curtailed output. The outlook in the region is far from encouraging as demand so far has contracted in year-on-year terms.

The Russia-Ukraine war has resulted in a sharp rise in the price of energy products including crude oil, natural gas and coal. Because steelmaking is energy-intensive, steel production costs have been rising. Worse, supply chain challenges have worked alongside rising energy costs which have crimped output in the broader manufacturing sector. These issues are unlikely to be resolved anytime soon, according to experts.

A recent report of the World Bank has forecast slower global GDP growth at 2.9 per cent in 2022. It has highlighted the looming stagflation risk, a combination of high inflation and slowing growth. The pain of stagflation could persist for years unless major supply increases are set in motion, it has warned.

So, slower GDP growth is sure to weigh on steel demand as the commodity is known as a ‘growth’ commodity given that its demand is positively correlated with growth.

Status in China

At the same time, the world’s largest steelmaker China has started to ramp up production again after the authorities eased the restrictions imposed on the steel industry with respect to emissions. According to data from the National Bureau of Statistics, Chinese steel production has already climbed to a 10-month high in April.

Interestingly, China’s steel product exports surged to 7.7 million tonnes in May, the highest level in a year, customs data show. To be sure, the Asian major’s local demand is somewhat muted. Higher iron ore import into China (over 90 million tonnes) in May suggests a continuing recovery in steel production.

Reflecting these realities, the SHFE prices for rebar in China have picked up again of late, while the futures contract on the LME is still falling. The situation is exacerbated by inflation, policy rate hikes by major central bankers, trade Sanctions, and unresolved supply bottlenecks. Consumer confidence across geographies is sliding lower.

The US Fed and ECB are expected to hike rates during the rest of the year. Lockdowns in China and slowing real estate further dim the outlook for steel. All these suggest that steel prices have more downside left. A further decline of up to 10 per cent from the current levels should surprise none.

(The author is a policy commentator and commodities market specialist. Views are personal)

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