EU's 2024 steel outlook bleak. Modest recovery expected next year?

• Real consumption seen dropping on global cues
  
  
• End-user segments expected to see declines
  
  
• Inflation slows, energy prices rise moderately
  
  

Morning Brief: The European Union's (EU's) apparent steel consumption is projected to experience another decline, although a moderate one, at -1.8%, revised downward from the previous forecast of +1.4%, as per "The Economic and Steel Market Outlook, 2024-25". The reasons for the downward forecast for the current calendar can be attributed to "poor developments in the industrial outlook and decreasing demand from steel-using sectors, particularly construction and automotive". The report further added, "The overall evolution of steel demand remains subject to high uncertainty."

In fact, the seeds of this negative outlook were sowed in the second half of 2022 and which continued up to the second quarter (Q2) of 2024. The severe consequences of the war in Ukraine and other geopolitical tensions, along with the deteriorating manufacturing outlook across the EU and uncertainty in the overall economic environment, continued to take their toll.

Apparent steel consumption in the EU continued to decrease (-1.3%) in Q2CY'24, confirming the negative trend observed in the preceding quarter (-3% in Q1CY'24). After a significant recession (-8.3%) in 2022, persistent downside factors such as ongoing conflicts, uncertainty surrounding energy prices and inflation combined with a worsened economic outlook have further negatively impacted apparent steel consumption in 2023. However, the data reveals a less pronounced contraction last calendar than previously expected (-6%, revised upwards from -9%) compared to 2022, marking the fourth annual recession in the last five years. Apparent steel consumption is defined as total shipments, minus exports, including imports.

Real steel consumption seen dipping

Real steel consumption, which is the actual volume of steel consumed by end-user industries in their production process, is expected to drop again by -3% in 2024. In Q2CY'24, real steel consumption increased 1.5%, after contracting -5% in Q1. It decreased in 2022 (-1.8%) and, albeit less severely, in 2023 (-1.4%). The counter-cyclical de-stocking trend started in late 2019 has persisted to date. The trend of weak demand conditions has continued throughout 2023 and 2024, given the protracted impact of the Ukraine war and growing geopolitical tensions, high inflation and uncertainty in the global industrial outlook and energy prices.

Finished imports rise in 7MCY'24, India leads

In Q2CY'24, total steel imports (including semis) into the EU slightly decreased y-o-y (-2%), following a rise in the preceding quarter (+12%). Imports of finished products in Q2 also decreased (-5%), following the rise seen in Q1 (+13%).

During the first seven months of 2024, imports of steel products dropped -7% compared to the corresponding period of the previous year. But, in 7MCY'24, imports of finished products rose 7% y-o-y, and so did imports of flat products (+9%) whereas imports of long products recorded flat developments.

Leading exporters to EU: In the first seven months of 2024, the main countries of origin for finished steel imports into the EU market, in descending order were thus on a monthly basis: India (375,000 tonnes), Turkey (344,000 t), South Korea (267,000 t), Vietnam (237,000 t), Taiwan (222,000 t), China (170,000 t), Ukraine (142,000 t) and Japan.

The top five exporting countries in the first four months of 2024 accounted for 57% of total EU finished steel imports. India has maintained its role of leading exporting country to the EU (with a share of 15%), followed by Turkey (14%), South Korea (11%) Vietnam (9.4%), Taiwan (9%), and China (7%).

In the first seven months of 2024, imports from major exporting countries showed diverging developments. Imports of finished products boomed from Turkey (+99%) and also increased from India (+27%) and Vietnam (+20%). On the contrary, imports of finished products plunged from China (-23%), Japan (-20%), and declined from South Korea (-7%) and Taiwan (-1%)

Key end-user industries stare at uncertain year

Not much construction ahead: In Q2CY'24, construction output dropped again by -0.4%, following the -2.6% in Q1. This negative trend is expected to persist till 2024-end, primarily due to the continued impact of high interest rates. Governments have been using public construction spending as a counter-cyclical tool since the COVID-led recession of 2020 to bolster recovery. However, while overall construction activity is expected to continue benefiting to a limited extent from governmental housing support and public construction schemes, the impact of these publicly-funded construction schemes is expected to significantly decrease in 2024 due to multiple downside factors, including shortage and rising prices of construction materials, as well as reduced fiscal room for construction spending in the EU, resulting in declining construction confidence.

Automotive to be in back gear: In Q2CY'24, the automotive sector's output decreased for the second consecutive quarter, and a steeper rate -7%, following -2.4% in Q1. In 2023, despite the overall subdued investment outlook, automotive output rebounded more robustly than expected (+8.3%). However, output remained low in historical terms, far below the levels seen in 2018 and 2019. Due to the protracted weakness of the manufacturing sector, overall EV standards uncertainty and lackluster consumer confidence, the sector is projected to experience a heavier contraction in output in 2024 than previously estimated (-6.5% from -3%). A very modest recovery is foreseen in 2025 (+1.9%, revised downwards from +2.3%). Demand is projected to remain weak until the macro-economic picture and consumer disposable income substantially improve.

Mechanical engineering growth to drop: Q2CY'24, output in the mechanical engineering sector fell for the third consecutive time (-5.7%, after -4.6% in Q1). Driven by the post-Covid industrial recovery, the rebound seen in previous quarters during 2022 and 2023 had brought output back to absolute high levels, even above those recorded before 2019. However, the sector's growth had remained exposed to ongoing downside risks, including the prolonged impact of Russia's invasion of Ukraine, increasing global geopolitical tensions and the continued deterioration of the industrial outlook, as observed throughout 2023 and 2024. However, the sector is expected to decline in 2024, with a projected deeper drop (-4.1%, from -1.9%). Recovery is anticipated in 2025 (+1%).

Domestic appliances fail to switch on: Q2CY'24 output in electrical domestic appliances recorded flat developments, after dropping -6.3% in Q1. This negative trend is expected to continue before reversing only in the first quarter of 2025. Output in the domestic appliances sector recorded two consecutive recessions in 2022 (-5.1%) and 2023 (-2.8%), and is expected to experience a third in 2024 (-2.2%, revised up wards from -2.7%). A more moderate recovery than previously estimated is foreseen in 2025 (+1.8%, from +6.2%).

Inflation slows at lower rate

Inflation reached highs unseen since 1985 in the EU in October 2022, peaking at 11.5%. However, it has eased considerably since then. Data from September 2024 confirm this downward trend, with HICP inflation in the EU at 2.1% (1.7% in the euro area, i.e. below the 2% target). Although energy prices have decreased considerably (from +41% in June 2022 to -2.1% in August 2024), core inflation has slowed down at a lower rate than the overall price index, from 6.6% in March 2023 to 2.7% in September 2024. This points once again to the fact that inflationary developments are also driven by endogenous factors.

Energy prices rise moderately

Throughout 2024, energy prices have seen a moderate rise since the beginning of the year to a current value of around euro 39 per MW/h in October 2024. The reasons behind these moderate developments in the gas price index include lower gas demand outlook due to the economic slowdown, a relatively mild winter, the EU's price cap, a higher consumption of wind and other renewables during 2023 and 2024, and a rather successful transition from Russian pipeline gas to ship-borne LNG from other suppliers.

Outlook

A modest recovery is foreseen in 2025, with consumption volumes at far below pre-pandemic levels. Real steel consumption is expected to recover moderately in 2025 (+0.6%, revised downwards from +2.4%). Some restocking along the steel distribution chain is not expected before end-2025.

EUROFER estimates an inflation rate of 3% in 2024 and 2.6% in 2025 (the European Commission's May 2024 forecast predicts 2.7% and 2.2%, respectively), thus remaining above the 2% ECB inflation.

Uncertainty over future developments in energy prices remains. The ongoing wars in Ukraine and Middle East along with other global geopolitical tensions could push future increases in gas and oil prices, which however have not so far materialised due to subdued global economic activity.