- In response to the COVID-19 pandemic's impact on demand, European steelmakers have swiftly reduced supply, with first-quarter production falling 10% year over year.
- With a raft of blast furnace capacity taken offline, S&P Global Market Intelligence now expects that EU-28 iron ore demand will contract by 10% year over year in 2020, reaching its lowest level since 2009.
- The slowdown in Europe is expected to result in iron ore exporters diverting more supply to the Chinese market in 2020.
- Yet the battle to contain the pandemic is showing signs of success, with a number of European countries beginning to ease restrictions. On balance, we expect the June 2020 quarter to mark the bottom of the European steel production cycle in 2020, with momentum building through the second half of the year as economies reactivate.
The COVID-19 pandemic has triggered a wave of negative impacts far beyond any recent global event. With the pandemic sparking a major global recession, demand and prices for most industrial commodities have been driven lower. Europe has been among the hardest-hit global regions to date, saddled with a high COVID-19 mortality rate and an acute economic slowdown. In this article, we explore the implications for European steel supply and iron ore demand and the prospects for the year ahead.
March and April saw a flurry of downward revisions to global GDP growth forecasts as the fallout from the pandemic intensified. The economic outlook paints a gloomy picture, with S&P Global Economics forecasting a 7.3% contraction in eurozone GDP in 2020. Italy, Spain and France are forecast to have GDP declines in the 8%-10% range this year, compared with 6%-7% falls in Germany and the U.K.
Steel — Aggressive supply cuts grab the headlines
With much of Europe only beginning to emerge from lockdown, economic dormancy has prevailed since early March. Steel demand in Europe has been hit hard, with an acute slowdown in new business being impacted by a regional slump in manufacturing activity. Demand for steel flat products has been dented by a spate of EU-based automakers halting production lines amid the lockdown. According to steel association Eurofer, the automotive sector accounts for 20% of finished steel demand in Europe. The construction sector, the region's largest steel consumer, is experiencing its sharpest contraction in activity since the 2009 global financial crisis. Italy, Spain, Eastern Europe and the U.K. are bearing the brunt of the construction slowdown.
In response to ailing demand, European steelmakers have been swift to reduce supply. A wave of blast furnace capacity has been taken offline, lowering regional pig iron production by 14%, or 1.2 million tonnes, year over year in March. First-quarter steel production performance in Europe makes for grim reading with a fall of 10% year over year; Italy, Poland, Belgium, Germany and Spain have led the supply restraints. EU-28 steel output plunged by 20%, or 3 Mt, year over year in March.
The aggressive supply response evokes comparison with the 30% plunge in EU-28 steel output in 2009, triggered by the global financial crisis. Regional steel supply slumped by around 60 Mt year over year as a wave of capacity was taken offline, some of which never returned. The following decade saw consolidation moves, led by ArcelorMittal, aimed at better aligning European steel supply with lower demand and reducing the sector's carbon footprint.
The EU-28 produced 158 Mt of steel in 2019, still 41 Mt below 2008. With European steel capacity now leaner than a decade ago, S&P Global Market Intelligence forecasts a more sedate 10% decline in regional iron and steel production in 2020. This will translate into a 16-Mt fall in EU-28 steel output year over year, to 142 Mt in 2020 — broadly on par with the 139 Mt produced in 2009.
Iron ore — Demand slumps in Q1, with pellet hit hard
Thanks to aggressive cuts in steel supply and, more directly, blast furnace pig iron production, we estimate that EU-28 iron ore consumption declined by 9.3%, or 3.4 Mt, year over year in the first quarter, with demand falling by 1.8 Mt year over year in March. Within the region, Germany had the biggest first-quarter decline, consuming 1 Mt less than the corresponding period in 2019. Poland and Spain saw demand fall by 540,000 tonnes and 390,000 tonnes, respectively.
Among the iron ore products, demand for pellets has dropped off abruptly, thanks to a reduced emphasis on boosting blast furnace productivity. In the first two months of 2020, German pellet imports plunged 30% year over year, compared with a 7% fall in imports of fines and lumps. Similar downward import trends were seen in Spain, the Netherlands and the U.K. in the early months of 2020. Subsequently, the S&P Global Platts estimate of Atlantic Basin pellet premium (65% Fe) has fallen to US$29 per dry metric tonne in the first quarter, down from US$37/dmt in the fourth quarter of 2019.
Outlook — Dismal for now, but signs for cautious optimism
S&P Global Market Intelligence forecasts that EU-28 iron ore demand will contract by 10%, or 14 Mt, year over year in 2020, to 123 Mt — its lowest level since 116 Mt in 2009. The region's iron ore demand has been falling each year since 2018. Global pellet trade is expected to be hit hardest in Europe, with lower imports expected from Brazil, Canada, the Commonwealth of Independent States, and Europe's local supplier, LKAB in Sweden. The slowdown in Europe will likely cause iron ore exporters to divert tonnages to China.
Despite all the doom and gloom, there are reasons to be optimistic about the second half of 2020. As of early May, we see encouraging signs that COVID-19 infection rates are mostly declining across Europe and that lockdown restrictions are being eased, notably in Germany, Italy and Spain. Signs of renewed activity in the manufacturing sector are also appearing, with Volkswagen, BMW, Volvo and Toyota restarting shuttered capacity — albeit targeting a cautious ramp-up. As lockdown restrictions lift across the region, economic activity should start to normalize over the summer.
It is also worth noting that, despite poor demand, regional steel prices have been supported by the swift cuts in supply. The S&P Global Platts TSI North European hot-rolled coil, EXW Ruhr, benchmark has fallen from an average of €478/t in February to €437.50/t as of May 1. During the 2008-09 downturn, regional hot-rolled coil prices plunged from a peak of €750/t in the September 2008 quarter to €360-€390/t in the June 2009 quarter. There are reasonable concerns, however, that rising steel imports could hit prospects for a recovery in the region, with the recent news that the EU Commission is considering imposing emergency restrictions on steel imports — likely by reducing import quotas if action is deemed necessary.
On balance, we expect the June quarter to mark the bottom of the European steel production cycle in 2020. Economic activity and steel supply are expected to build cautious momentum over the summer before rallying in the fourth quarter, fueled by the prospect of a better 2021 ahead. The main risks to this forecast are that the demand side of the European economy fails to rebound sufficiently, with excess stocks needing to be cleared, and, even more worryingly, a second spike in COVID-19 infections.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.