EU apparent steel consumption drops for 6 consecutive quarters in Q3CY'23. What to expect in CY24?

• Construction sector enters recession in Q3CY'23
  
  
• Finished steel imports fall 10% in Jan-Nov'23
  
  
• Apparent steel consumption unlikely to rebound before Q1CY'24
  
  

Morning Brief: The severe consequences of the war in Ukraine and the deteriorating overall economic outlook continued to take their toll on the European Union's (EU's) apparent steel consumption in the third quarter (July-September, 2023) of last calendar.

In Q3CY'23, apparent steel consumption dropped for the sixth consecutive quarter (-3.9%), albeit the rate was slower after -8% seen in the preceding quarter. The total volume decreased to 30.4 million tonnes, marking the third lowest level since the outbreak of the pandemic in the second quarter of 2020, informs the Eurofer "Economic and Steel Market Outlook, 2024-25".

Demand conditions have been worsening considerably since the second half of 2022, and this negative cycle is expected to persist at least until the fourth quarter of 2023, as a result of growing global economic uncertainty, high interest rates and overall manufacturing weakness. Domestic deliveries continued to mirror weak demand and decreased (-2.9%) for the sixth consecutive time in Q3, although at a less pronounced pace than in Q2 (-7.1%).

After a significant recession (-8.3%) in 2022, persistent downside factors such as ongoing conflicts, uncertainty surrounding energy prices and high inflation - albeit slowing down, combined with a worsened economic outlook, are set to negatively impact again the EU's apparent steel consumption in 2023, for which the forecast indicates a more pronounced contraction (-6.3%) compared to the previous outlook (-5.2%), as per the report. This would mark the fourth annual recession in the last five years. This downward trend is set to weigh also on the rebound which was anticipated for this year.

EU steel-using sectors

Construction de-constructed: The construction sector entered recession in Q3CY'22 and saw its fifth consecutive quarterly drop (-1.2%, after -3.4% in Q2) in Q3CY'23. The positive trend in SWIP, started after the pandemic, continued until Q2CY'23 in spite of soaring energy prices impacting production costs, component shortages and lower output that took their toll on total production activity in steel-using sectors in the second half of 2022.

But, deterioration of the economic and industrial outlook in the EU - particularly due to high inflation and the subsequent interest rate hike by the European Central Bank (ECB) - had limited impact on steel-using sectors' output so far. The construction sector, accounting for 35% of EU steel consumption, was the only significant exception.

The increase in construction material prices, coupled with labour shortages in certain EU countries, growing economic uncertainty and higher interest rates impacted construction output and this negative trend is expected to extend up to H1 2024, mainly due to the impact of continued monetary policy tightening via higher mortgage rates on housing demand

Automotive revs up: In Q3, the automotive sector's output increased for the sixth consecutive time (+5.4%, following +11.5% in Q2). This sustained rebound has been continuing partly due to the very low output volumes in 2021 and 2022. However, output remains well below levels seen before Covid and even below those seen before the recession in 2019, due to rising trade tensions and a downturn in manufacturing. Consumer resilience - despite subdued disposable income growth and uncertainty over electric vehicles (EVs) implementation - has somewhat fuelled demand in the last four quarters. There has been a consistent improvement in demand during 2023, supported by easing energy prices. However, in December 2023, the EU car market experienced the first contraction (-3.3%) after 16 consecutive months of growth primarily due to comparison with the exceptionally positive performance of December 2022.

Mechanical engineering: Q3 output in the mechanical engineering sector experienced a marginal drop (-0.1%), after 10 consecutive quarterly increases (+1.8% in the preceding quarter). However, growth remains exposed to ongoing downside risks, including the prolonged impact of Russia's invasion of Ukraine and the continued deterioration of the economic and industrial outlook, as observed throughout 2023. Consequently, output is expected to shrink also in Q4, with a projected return to positive territory expected only in the second half of 2024.

Consumer durables: Electric domestic appliances activity in Q3 experienced the ninth consecutive marked decline in output (-2.8%, after -4.4%). These figures are in line with the declining trend observed since Q2CY'21, which marked the end of a bigger-than-expected post-Covid recovery in output. This trend is expected to reverse in Q4CY'23 and see a rebound in 2024.

Finished steel imports drop 10% in 11MCY'23

In Q3, total steel imports (including semis) into the EU recorded flat developments y-o-y, following the drop seen in Q2 (-10%).

Imports of finished products also fell (-10%) in Q3 quarter of 2023, following an equivalent decrease in the preceding quarter. Imports have displayed consistent volatility throughout 2023, mirroring the fluctuations seen in the three preceding years. Reflecting much weaker demand since the first quarter of 2022, imports have been declining over the second half of 2022 and until the second quarter of 2023, albeit continuing to show volatility. During the 11 M CY'23, imports of all steel products fell (-11%) compared to the corresponding period of the previous year.

Imports by country of origin: India led the EU's finished steel imports in the first 11 months of 2023. The main countries of origin for finished steel imports into the EU market, in descending order, were India, South Korea, China, Vietnam, Taiwan, Turkiye and Japan. The top five exporting countries in the first 8 months of 2023 together represented 58% of total EU finished steel imports.

India maintained its role of leading exporting country to the EU (with a share of 13.7%), closely followed by South Korea (13.1%), then China (11.4%), Vietnam (10.2%) and Taiwan (9.5%).

Over the first 11 months of 2023, imports from major exporting countries continued to show diverging developments. For instance, imports of finished products from Turkiye and China plunged (-51% and -13% respectively), whereas imports from India (+7%), Japan (+32%), Vietnam (+38%), Taiwan (+12%) and South Korea (+6%) increased.

Imports by product category: According to customs data, imports of both flat and long products decreased (-9% and -25%, respectively) in the first 11 months of 2023. The share of long products out of total finished steel product imports was 21%. Within flats, imports of all flat products decreased during the first 11 months of 2023 compared to the same period in 2022. In particular, cold-rolled sheets dropped markedly (-27%), as well as hot dipped (-22%), coated sheets (-24%) and organic (-30%). The only exceptions were imports of quarto plate and hot-rolled wide strip, which increased (+11% and +9%, respectively).

Regarding long products, imports during the first eleven months of 2023 showed moderately positive developments only for heavy sections (+2%). In contrast, imports of rebars, wire rods and merchant bars all markedly declined (-31%, -26%, and -24%, respectively).

Finished steel exports up marginally

Q3 saw total EU exports of steel products to third countries marginally increasing (+3%, after +1% in Q2). Similarly, exports of finished steel products rose (+3%, after +1%), and so did exports of long products (+21%, after +14%). On the contrary, exports of flat products dropped (-5%, as in the preceding quarter). During the first 11 months of 2023, total exports declined (-3%), as well as exports of finished products (-4%) and flat products (-9%), whereas exports of long products increased (+8%).

Outlook

The negative steel market trend observed in the first half of 2023 is showing persistence while getting more acute, the report indicated.

• Despite the EU industry having proven quite resilient up to the second quarter of 2023, the remainder of 2023 appears to be characterised by a worsening combination of uncertainties in energy prices, weak demand, inflation, geopolitical tensions and economic challenges driven by high interest rates.
  
  
• In 2024, steel-using sectors' growth is projected to further decelerate (+0.2%, revised downwards from +0.4%), mainly due to the second recession in a row in the construction sector, before picking up moderately (+1).
  
  
• In 2024, conditional on more favourable developments in the industrial outlook and increased steel demand, apparent steel consumption is projected to recover at a lower rate than previously estimated (+5.6%, formerly +7.6%). The overall evolution of steel demand remains subject to very high uncertainty. Quarterly improvements in apparent steel consumption are not expected before the first quarter of 2024.