EU's apparent steel consumption falls in 2023; demand outlook uncertain for 2024

• Real steel consumption falls 4.7% y-o-y, 4% in Q4
  
  
• Steel imports fall last year, India leads in 2MCY'24
  
  
• High interest rates, mortgages hit construction sector
  
  

Morning Brief: War-related disruptions, unprecedented rises in energy prices and production costs have taken a toll on the European Union's apparent steel consumption in 2023, which dropped nearly 9% to 126 million tonnes (mnt) against 138 mnt in 2022, as per Eurofer's "Economic and Steel Market Outlook, 2024-25".

In the fourth quarter (Q4) of 2023, however, apparent steel consumption increased after six consecutive drops (+2.8%, after -5.7% in the preceding quarter). This is due to comparison with very low volumes one year earlier, as Q4 of 2022 marked the second-lowest consumption volume on record since the outbreak of Covid in Q2CY'20. The total volume in Q4 stood at 29.9 mnt, marking the fourth lowest level on record.

The negative cycle of 2022 has continued until Q4CY'23, as a result of growing global economic uncertainty, high interest rates and overall manufacturing weakness.

Apparent steel consumption refers to the sum of production plus imports minus exports.

Real steel consumption

The EU's real steel consumption, which is the use of all steel products by steel-using sectors, dropped 4.7% in 2023 and 4% in Q4CY'23, after the 2.9% contraction seen in Q3CY'23.

The trend of weak demand conditions has continued in the first three quarters of 2023, given the protracted impact of the war in Ukraine, growing global geopolitical tensions, high inflation, uncertainty on global industrial outlook and energy prices. De-stocking has continued at very high historical levels-reflecting poor demand perspectives. Real consumption growth was negative both in 2022 and 2023.

Imports

In 2023, total steel imports fell 8.5% compared to the previous year, following the drop already observed in 2022 (-7%).

Last year, imports of finished products decreased overall by 11%. Specifically, imports of flat products fell 8%, along with imports of long products (-22%). Imports have displayed consistent volatility throughout 2023, mirroring the fluctuations seen in the three preceding years.

But imports of finished products increased 11% in Q4CY'23, following the decrease in the preceding quarter (-10%). In the same period, imports of flat products significantly rose 25% after a drop of 5% in Q3, whereas imports of longs slumped again by 19%, after dropping 29% in the preceding quarter.

During the first two months of 2024, imports of all steel products rose 4% compared to the corresponding period of the previous year. In this period, imports of finished products rose 20% y-o-y, and flat products by 33%, whereas imports of long products fell 15%.

Leading exporters to EU: In the first two months of 2024, the top five exporting countries in the first two months of 2024 accounted for 55% of total EU finished steel imports. India maintained its leading role with a share of 13.3%, followed by Turkey (11.4%), South Korea (10.6%), Vietnam (10%), Taiwan (9.6%), Japan (8.3%) and China (7.4%).

In the first two months of 2024, imports from major exporting countries showed diverging trends. Imports of finished products from China plunged 30% y-o-y, and dipped 1% from South Korea. On the contrary, imports from Vietnam surged 130%, from India by 91%, and Turkey, 58%. Japan was up 10%, and Taiwan, 14%.

Exports

Total exports of steel products from the EU to third countries in Q4 dipped 1%, after increasing 3% in the preceding quarter. Exports of finished steel remained flat q-o-q after rising 3% in Q3. In particular, flats again saw a drop (-7%, after -5% in Q3), whereas long products recorded another increase (+15%, after +19%). Over the first two months of 2024, total exports declined 2% but exports of finished products increased 9%, as a result of a rising trend for both flat and long products (+9% each). Throughout entire 2023, exports of finished products fell (-2%), due to a decline in flat products (-7%) despite an increase in long product exports (+10%)

Key steel end-user industries

Construction: Increase in construction material prices, coupled with labour shortages, growing economic uncertainty and, notably, higher interest rates impacted construction output for the sixth consecutive quarter (-0.9% in Q4CY'23, after -0.2% in Q3). This negative trend is expected to persist throughout 2024, mainly due to the lagged impact of high interest rates with subsequent higher mortgages on housing expected despite likely monetary policy easing in the course of the year. Construction has 35% share in steel consumption. In line with real production volumes, recession in the sector has also been confirmed by investment in construction, which recorded the fourth consecutive drop on a yearly basis in Q4CY'23 (-0.7%, after -0.5% in Q3). As expected, residential investment dropped for the fifth consecutive quarter, hit by rising mortgage interest rates (-2.7%, after -3.5% in Q3), resulting from monetary policy tightening by the ECB to curb inflation.

Automotive: In Q4CY'23, the automotive sector's output increased for the seventh consecutive time (+2.8%, following +4.8% in Q3). This sustained rebound has been continuing since Q2CY'22, partly due to the comparison with the very low output volumes in 2021 and 2022. However, output remains well below the pre-pandemic levels and even below those seen before the pre-Covid recession in 2019, due to rising trade tensions and a downturn in the manufacturing sectors. Consumer resilience-despite subdued disposable income growth and uncertainty over electric vehicles (EVs) implementation-has somewhat fuelled demand in the last four quarters, leading to a rebound in the sector's output since the second half of 2022.

EU passenger vehicle demand: Despite supply chain issues resulting in delays in orders, war-related disruptions, low consumer confidence and squeezed incomes due to persistent inflation and economic uncertainty, there has been a consistent improvement in demand throughout 2023 that has continued up to the first two months of 2024. This trend was also supported by easing energy prices. In February 2024, the EU car market surged (+10.1%) compared to one year before.

Mechanical engineering: Mechanical engineering sector output in Q4CY'23 fell-1.9% after 10 consecutive quarterly increases (+0.4% in Q3). Driven by the post-Covid industrial recovery, the rebound brought output back to absolute high levels, even above those recorded pre-2019. However, the sector's growth has 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 economic and industrial outlook, as observed throughout 2023. Consequently, the sector's output is anticipated to shrink throughout 2024, with a projected return to positive territory only in the first half of 2025.

Macro indicators

GDP: Thanks to a higher-than-expected resilience of the economy and a positive, albeit declining, contribution from the services sector, the EU economy avoided recession in 2023. However, growth was much lower than in 2022 (+0.6% versus +3.4%).

Inflation: Inflation reached highs unseen since 1985 in the EU in October 2022, peaking at 11.5%, but has been easing considerably since then. Data from February 2024 (2.8%) confirms this downward trend (2.4% in the euro in March). Although energy prices have decreased considerably (from +41% in June 2022 to -3.2% in February 2024), core inflation has slowed down at a lower rate than the overall price index, from 6.6% in March 2023 to 3.5% in February 2024.

Energy prices: Throughout 2023, energy prices have continued to decrease from the all-time peaks seen in July 2022. The TTF Natural Gas Price Index went from peaking at euro 342 per MW/h in August 2022 - which was 20 times the average value observed in 2021-to the value of around euro26 per MW/h in April 2024. The reasons behind these developments include a lower gas demand outlook due to the economic slowdown, a relatively mild winter, the EU's price cap, higher consumption of wind and other renewables during 2023 and a rather successful transition from Russian pipeline gas to ship-borne LNG from other suppliers. On the other hand, the ongoing war in Ukraine, turmoil in the Middle East and global geopolitical tensions could push up future prices.

Outlook

Real consumption is expected to drop again - albeit more moderately-in 2024 by 1.7% and recover only in 2025 (+2.1%, formerly estimated at +1.3%), as some re-stocking is expected only from Q1CY'25.

In 2024, steel-using sectors'growth is projected to dip 1%, due to the second recession in a row in the construction sector, persistent geopolitical tensions, and the lagged impact of high interest rates on the manufacturing sector, before picking up moderately by 2% in 2025.

The overall evolution of steel demand remains subject to very high uncertainty. However, quarterly improvements in apparent steel consumption are anticipated to continue over the first two quarters of 2024, although volumes may still remain below pre-pandemic levels.

Despite the resilience shown in 2023, the outlook for 2024 appears to be characterized by a worsening combination of uncertainties in energy prices, weak demand, inflation, geopolitical tensions and economic challenges driven by high interest rates.