EUROFER revises downward EU's steel demand forecast for CY23

• Construction to experience mild recession this year
  
  
• Automotive to recover but remain low in comparison to past
  
  
• More pronounced EU demand rebound likely next year
  
  

The European steel association, EUROFER, has revised downward its forecast for demand in 2023 to -3% from the previous -1%. This revision is based on the data that apparent steel consumption in the first quarter (Q1) of January-March, 2023 showed a downtrend of -11.7% with a volume of 34.50 million tonnes. While this represents an improvement over the- 19.3% drop seen in the last quarter of 2022, "the latest data still show underperformance compared to 2021-22. As a result, apparent steel consumption for the whole of 2023 has been further cut (-3% from -1%)," a EUROFER release stated.

Why the revised forecast?

The lingering impact of several downside factors severely affected apparent steel consumption in 2022. These included high energy prices, war-related disruptions, and the resultant sluggish demand prospects. These factors continue to feed uncertainty and pressure the steel market outlook for 2023, resulting in a deeper-than-expected recession of -3%. This would mark the fourth negative performance in the past five years.

Domestic supplies

Domestic deliveries followed the same downward path, declining -6.2% in Q12023, the fourth consecutive quarter's decline, although at a slower pace than the preceding quarter (-15.1%).

Imports

Mirroring the continued and quick deterioration in steel demand, imports into the EU- including semi-finished products- sharply decreased also in the first quarter of 2023 (-28%, after -33% in the preceding quarter). Overall, total imports from third countries in 2022 fell -6.7%. However, it is worth noting that the drops in imports seen in the last three quarters essentially reflected weak demand conditions. But, the share of imports out of apparent consumption remained considerably high in historical terms, even in the first quarter of 2023 at 22%, the release stated.

"Reflecting much weaker demand since the first quarter of 2022, imports have been declining in volumes over the second half of 2022 and until the first quarter of 2023, albeit continuing to show volatility. However, over the entire year 2022, imports remained at elevated historical levels, resulting in high import shares out of apparent consumption, as well as in a widening trade deficit vis-a-vis third countries" EUROFER said.

Exports

In Q12023, the EU' s total steel exports to third countries decreased -8%. Exports of finished steel products fell -10%, and both flat and long products recorded a drop of -12% and -6% respectively. During the first four months of 2023, total exports declined -9%, and finished products by -11. Flats dropped -14%) and longs -6%. During the first four months of 2023, the main destinations for EU steel exports were the United Kingdom, the United States, Turkey, Switzerland and Egypt, followed by China, Brazil, Ukraine and Norway. The first five destinations together accounted for 55% of total EU finished product exports.

Outlook for steel-consuming sectors

Despite Russia's invasion of Ukraine and above-average energy prices, the EU's steel-using sectors' output continued to increase up to the first quarter of 2023, showing unexpected resilience. The Steel Weighted Industrial Production index (SWIP) increased further (+3.7%, following +2.5% in Q42022). The positive trend in Q12023 was a combination of favourable developments in the automotive, mechanical engineering and transport sectors on one hand, and a drop in domestic appliances, tubes and metalware output on the other. The construction sector was nearly flat (+0.1%) and is expected to experience recession in 2023.

This positive trend, which began after the pandemic, had continued in spite of soaring energy prices impacting production costs, component shortages and lower output that took their toll on production activity in steel-using sectors in the second half of 2022.

Construction: The sustained increase in construction material prices, coupled with labour shortages in certain EU countries and growing economic uncertainty, have finally impacted the positive trend in construction output observed since Q42020 (eight consecutive quarters of growth). In Q42022, output recorded for the first time a slight decline (-0.1%), while it was nearly flat (+0.1%) in Q12023. Its expansion is projected to continue during 2023, but at a much slow pace due to lower public expenditure in construction. As expected, residential investment continued to drop, (+2.7% in the first quarter of 2023, after -1.3% in the preceding quarter), due to higher mortgage rates resulting from monetary policy tightening by the ECB to curb inflation.

The subdued business investment outlook remains unfavourable to investment in non-residential projects in the near future. Thus, construction is expected to experience a mild recession in 2023 (-0.5%) and to recover modestly (+0.7%) in 2024.

Automotive: In Q12023, the automotive sector's output increased for the fourth consecutive time (+15.7%, following +7.8% of the previous quarter). This rebound is mostly due to comparison with very low output volumes one year earlier. Automotive was hit more than any other steel-using sector during the pandemic in 2020, but its output rebounded in early 2021. However, output has been heavily impacted by severe supply chain issues, as well as from the overall uncertain outlook. Despite the increases recorded over the last three quarters, output remains well below the levels seen in the pre-pandemic era.

Full recovery in global trade and external demand from major markets such as the United States, China and Turkey will remain a key factor for EU car exporters. The potential EU market share held by Chinese EV producers is another source of concern. In the longer-term, political commitment at EU level towards the full adoption of EVs by 2035 should prove supportive, despite the fact that general car demand appears to be dependent on fragile consumer confidence throughout 2023 and possibly 2024.

Growth in output is expected to rebound in 2023 (+6.4%, previously +1.2%). However, output will still remain relatively low in historical terms. The sector will experience another drop in output in 2024 (-4%)

Mechanical engineering: In Q12023, output in the mechanical engineering sector continued to grow by +6%, recording the ninth consecutive quarterly increase (+6.1% in the preceding quarter). However, the sector's output growth remains exposed to continued downside risks, including the disruptive impact of Russia's invasion of Ukraine and the quick deterioration of the economic and industrial outlook in early 2023. While the latter has not yet been fully reflected in mechanical engineering's output, its growth is expected to shrink in the second and fourth quarters of 2023. Only a very moderate increase in 2023 (+1%, revised upwards from +0.5%) is expected due to the continued weakness of the manufacturing sector amid inflation. The sector is expected to achieve slightly higher output growth in 2024 (+1.2%)

Outlook

However, a more pronounced rebound in EU steel demand is expected in 2024 (+6.2% from +5.4%) if positive conditions materialise. Improvements in apparent steel consumption are not expected before the third quarter of 2023.

"The European steel industry has been navigating through numerous challenges for a long time now, from the pandemic to the energy crisis and other ongoing disruptive factors. At the same time, the EU is at a critical juncture to achieve its decarbonisation, circularity and strategic autonomy targets, for which steel is a key enabler. Supporting European green steel becomes therefore crucial to drive the uptake of renewables, hydrogen and the clean-tech economy in the EU," said Axel Eggert, Director General, EUROFER.