2022 Steel Industry Review
Back in December last year, I described 2021 as having been ‘eventful.’ The same language can be used to describe the events of 2022 - albeit for different reasons. The word ‘eventful’ probably doesn't go nearly far enough….
At the beginning of this year, the word that perhaps most in our minds was a new one - Omicron. The Omicron variant of covid-19 posed a very real risk of further lockdown restrictions. However, as January progressed, it became clear that we were through the peak of the omicron variant and there was new hope that this would give businesses the confidence to invest and enable the UK to lead the post-omicron recovery.
From a steel industry perspective, the UK and USA had opened steel tariff discussions and there was a mood of optimism that automotive OEMs were closing in on a solution to the semiconductor supply problems that were hampering production and stifling demand. Steel prices had softened a little and general stock availability was healthy when compared to the previous year.
However, as we now know, Vladimir Putin was busy amassing a huge Russian military force on the Ukrainian border in preparation for an invasion. Many doubted whether or not Putin would choose to invade - perhaps more in hope than expectation - but on the 24th of February 2022, Russia launched a large-scale, illegal invasion of Ukraine. The human impact of this was and continues to be, devastating.
The immediate economic impact of the invasion took the form of massive uncertainty. Early optimism with regard to steel prices and material availability was shattered. Western sanctions against Russia were implemented quickly and accelerated rapidly. Energy prices began to surge upwards and legitimate concerns over steel availability emerged. With both Russia and Ukraine being net exporters of nearly 45 million tonnes of steel, it’s not hard to understand why that was the case. Of course, it wasn’t just the supply of steel that was cause for concern. The anticipated recovery in the availability of semiconductors was also disrupted, further stifling the automotive recovery.
By the end of March, prices in mainland Europe and the UK had increased significantly. For example, hot rolled coil and cold reduced coil prices increased by 30-40% in just a few weeks. Moreover, tariff quotas complicated attempts to source from non-European mills whilst China, the engine of the global steel industry, was busy battling another wave of lockdown with the implementation of its zero covid strategy. This inevitably disrupted industrial output and steel demand.
As we moved into summer, the market began to settle. The war raged on but the steel supply chain was showing signs of adjusting to a new reality. For example, re-rollers, who traditionally depend heavily on slab from Russia and Ukraine, were initially concerned about their ability to source feedstock and prices increased quickly as a consequence. However, by the summer, they appeared to have successfully found alternative sources, easing concerns about production capacity.
Energy price concerns and rampant inflation were now entering the public discourse, with widespread fears taking hold about a looming cost of living crisis. Steel buyers became ever more cautious and steel demand started to weaken. In the UK, business confidence was negatively impacted by considerable political uncertainty.
Partygate ultimately led to the acrimonious downfall of Prime Minister Boris Johnson, but only after a long period of ‘will he or won’t he go’ uncertainty. The shortlived premiership of Liz Truss, and the economic upheaval caused by the ‘mini-budget’, compounded this uncertainty. In short, energy costs, labour shortages, inflation and political uncertainty made for a very pessimistic outlook.
It was no surprise, therefore, when the pound hit a historic low against the dollar in September. By this point, steel prices in the UK had softened considerably despite the fact that the competitiveness of import tonnes was limited by the reduced value of the pound against the dollar. Steel buyers were beginning to ask themselves the question ‘when will we reach the bottom’ and were only placing orders when it was absolutely necessary.
The passing of Her Late Majesty Queen Elizabeth II and the period of mourning that followed, almost certainly created a lull in business activity and delayed government decision-making further. The hoped-for steel market uplift after the summer shutdown failed to materialise.
During the final quarter of 2022, prices had continued to slide. After an unprecedented period of price increases, where new price highs were reached, we have seen prices quickly fall back to pre-pandemic and pre-Ukraine war levels - nobody expected this. Mills have been busy taking out capacity to better align production with demand. Blast furnaces have been taken offline and production hours reduced in an effort to find the correct balance. Have prices reached the bottom? As I write this - Yes is the answer. Mills have increased their offers by anything upto $100 USD p/t, depending upon the product and mill. Will these price increases stick?….
However, the concern has to be that capacity reductions and supply chain constraints are only going to lead to a continuing cycle of price volatility. As I wrote in the October briefing, the impact of soaring energy costs on steel production cannot be avoided indefinitely. recent International Steel Statistics Bureau data show that in 2020 it cost just over £400 to produce a tonne of long steel via an electric arc furnace in the UK. By August of 2022, this figure was reportedly around £790/mt and is now around £970 p/t.
The backlog of automotive orders is thought to be high with demand stifled by supply chain difficulties rather than a fall-off in underlying demand.
The cost pressures described above and the lifting of covid restrictions in China all point towards an uplift being on the horizon. In fact, producing mills appear to have begun the process of increasing prices. For example, Tata and JSW have recently withdrawn offers, and are reviewing their price position for any new business. These new offers will almost certainly be at higher levels.
It’s true that steel buyers remain cautious about placing orders beyond the essential, and there are still significant volumes of higher-priced stock in the supply chain that need to be worked through, although, these volumes are diminishing. Thus, the need to re-order is growing for many - increasing demand for mills. Furthermore, the ongoing impact of the war in Ukraine and the global energy cost crisis are unlikely to change in the short term. However, the tide will eventually turn and when it does, there is a strong possibility of another price surge and all of the volatility and uncertainty that this brings.
In summary, I would say that uncertainty is the word that best describes 2022. As things stand, that trend looks set to continue. However, it is my firm hope that things will be much less ‘eventful’ during 2023.
From all of us at Cooper and Jackson, I would like to thank you for the support you have shown in reading these briefings during the year and take the opportunity to wish you a very happy and prosperous new year.