Steelmakers responded quickly to the sudden plunge in demand caused by the coronavirus pandemic with capacity cuts, but the timing and extent of a recovery remains uncertain with key consuming industries still under pressure.
As of May 18, production stoppages had halted 7% of global output capacity excluding China, according to research from VTB Capital. Europe's already strained steel sector has borne the brunt of shutdowns as the coronavirus spread from east to west, with 18.9 million tonnes or 12% of its capacity closed, while 13.6 Mt or 15% of capacity was idled in the U.S.
The world's largest steelmaker, ArcelorMittal, suspended operations from the Americas to Asia, reducing capacity by roughly 24.5 million tonnes between March 19 and April 22, according to VTB Capital's analysts. The Luxembourg-headquartered group expects shipments to slump 25.6% to 30.8% in the second quarter from 19.5 Mt in the first, according to a recent presentation.
While China's steel production has picked up quickly since late March with returning downstream demand, the question for the rest of the world will be how much capacity has been shut down permanently.
The European Steel Association, also known as Eurofer, expects EU demand to fall by 10% to 20% in 2020, following a 5.3% contraction in 2019, which was the worst performance since 2012. The region had seen apparent consumption shrink 10% in the fourth quarter of 2019, due to lower manufacturing, even before the pandemic arrived.
"With [purchasing managers' index] readings at record lows in Europe, the visibility is still very low on when [a] recovery could start actually, and in response to that, the major steel producers in Europe have taken drastic measures already," according to Goetz Grossmann, a vice president at Moody's covering the European steel industry.
The bloc also faces more pressure from cheap imports than other regions, Grossmann told S&P Global Market Intelligence. EU Trade Commissioner Phil Hogan warned in April that steelmakers could face a flood of cheap imports with global stockpiles growing due to the global crisis, while the European Commission began an investigation into hot-rolled flat product imports from Turkey in mid-May.
Turkey accounted for the largest volume of EU finished steel product imports in February with 320,000 tonnes, followed by Russia with 290,000 tonnes, according to Eurofer. The industry body expects import pressure to penalize EU steel producers once demand picks up and normal market conditions return.
Martina Merz, CEO of Germany's largest steelmaker, thyssenkrupp AG, said on a May 19 conference call that the conglomerate could sell its loss-making steel division amid a restructuring, citing industry overcapacity worsened by the pandemic. That overcapacity could continue to grow after the pandemic, CFO Klaus Keysberg said on the call.
The U.S. is facing a 25% decline in unit sales in 2020 with about a 16% rebound in 2021 from a low base, according to Carol Cowan, a senior vice president at Moody's covering the U.S. steel industry. While it could take the industry at least two to three years to return to levels comparable to the past, the pandemic has also accelerated trends, such as a shift towards working from home, with the potential to transform the industry in the long term, according to Cowan.
"Most of the capacity idling [in the U.S.] has been at the integrated [steelmakers] and ... there's about probably 7 million or more tonnes of new [electric arc furnace] capacity that will be coming on the market in the next several years," Cowan said. The new capacity is focused on thicker and wider steel and is taking on more of what has typically been the domain of integrated producers, the senior vice president added.
"We've seen capacity utilization up a little bit in the last week or so, some of this is on expectation of the auto manufacturers restarting, which at selected plants is starting today," Cowan said. "We're seeing prices up off the bottom in mid-April, but some of that is reflective as well, as scrap prices are increasing. So as we look at the market, certainly, automotive looks to be resuming production at some level, but this is going to take a while to see, and I think it's a little premature to anticipate anything particularly meaningful."
"Temporary capacity closures likely need to become more permanent," UBS Securities analysts wrote in a May 14 note. About 15 Mt of the roughly 25 Mt of North American steel curtailed to date is temporary, while the remaining 10 Mt is insufficient to offset excess supply in 2021 driven by new capacity and lower demand, according to the bank's analysts.
"In the U.S., it looks like they're preparing to actually push through the new capacity come what may and all [of the producers] are seemingly convinced that they've got a better survival rate than the others," Société Générale analyst Christian Georges told Market Intelligence. There is no obvious weak link in the industry that could break and make room for the others, Georges explained.
In contrast to the rest of Europe, Russia has had no stoppages, despite struggling with the highest number of confirmed coronavirus cases on the continent. The country's low-cost blast furnaces will export what cannot be sold locally, BCS Global Markets' head of research, Kirill Chuyko, told Market Intelligence. Russia's leading domestic producer, PJSC Magnitogorsk Iron & Steel Works, is reducing domestic sales by 40% to 50% in May and doubling exports. Only smaller companies operating electric arc furnaces will suffer, according to Chuyko.
However, antidumping investigations are likely to follow as Russian mills will have to sell everything at any price, Chuyko said.
"The construction sector makes up about 66% of end-user demand for steel in Russia, followed by pipe producers, and while the construction sector is going to hold up fairly well, obviously, pipe producers will suffer with [capital expenditure] slashed by oil and gas producers," said Denis Perevezentsev, a vice president at Moody's covering the steel industry in Russia and the Commonwealth of Independent States.
Russian producers remain competitive, though, with the ruble substantially depreciated since the beginning of the year. "They also have the capacity to increase their share of sales on export markets, which some of them already demonstrated in [the first quarter], and some of them will continue growing their share of export sales in [the second and third quarter]," Perevezentsev said.
With a premium of around US$100 per tonne, the domestic market remains very important for Russian producers despite the difficulties, because the situation on the export market is even more challenging, particularly in Europe. With this in mind, one of the opportunities for Russian steelmakers will be to increase their share of sales in Europe, according to Perevezentsev.
Countries with their own iron ore, such as Brazil, India and Russia, are trying to export more steel while their domestic markets are weak, but margins will be slim due to decreased demand, according to Bank of America Securities analyst Timna Tanners. Iron ore prices have remained elevated, pressuring margins, particularly for European steelmakers.