OECD Steel Committee says market remains strong but growing risks cloud outlook

05/12/2007 - The global steel market is in its sixth year of strong output and demand growth. But the outlook for 2008 is less buoyant amid weaker prospects for global economic growth, according to industry and government officials at the OECD’s Steel Committee meeting in Paris on 3-4 December 2007.

Statement from Risaburo Nezu (Japan), Chairman of the OECD Steel Committee

World steel markets remain strong in general, led by buoyant activity in Asian markets. Market conditions in North America have softened, while indicators suggest some moderation in European steel activity. While world demand for steel should continue to expand favourably in 2008, growing economic risks associated with housing-market problems cloud the outlook to some extent. Continued capacity expansions observed in various parts of the world could impact on prices if demand growth slows significantly.

World steel production

Crude steel production is on track to grow by around 98 million tonnes in 2007, i.e. by 8%, to reach a level of around 1,330 million tonnes. Weaker growth in North America and the EU is being offset by rapid production expansions in emerging economies.

• China continues to drive world production developments. In the first ten months of 2007, Chinese steel production reached 409 million tonnes, up 18.1% from one year earlier, growing faster than domestic demand. This brings its share of world production to 37%, up from 34% in 2006. Growth appears to have eased in recent months, however, reflecting shortages of raw materials. Elsewhere in Asia, Japanese production is running at its highest level since the early 1970s, supported by strong domestic and external demand. Production in South Korea and Chinese Taipei is also up on the year to date. In India, production figures have been revised upwards, making the country the fifth largest producer in the world in 2006. Indian production continued to increase rapidly this year, driven by strong demand. 
• The European Union is registering a slowdown in production growth this year as imports account for an increasing share of domestic demand. In the first ten months of 2007, steel production rose by 1.3% from a year earlier, i.e., by 2.3 million tonnes, to 176 million tonnes. Solid growth is still being observed in Germany, while output levels have either stagnated or fallen in Italy and France.
• In the CIS countries, growth in steelmaking activity is maintaining momentum, led by Russia and the Ukraine. Production in the region is being supported by capacity expansions in electric-arc furnace steelmaking.
• In North America, steel production in the US is declining following last year’s solid gain and import-induced inventory build-up. In the first ten months of the year, steel producers cut production by 3% from the level prevailing a year earlier to 81.6 million tonnes. Inventory levels are falling to more normal levels. In Mexico, production is increasing rapidly towards a record level of 17 million tonnes in 2007, supported by capacity increases particularly in the long-products segment of the market.
• South American steel output is rebounding from last year’s slowdown. Production in Brazil, the largest producer in the region, was up by 9.2%, i.e. by 2.2 million tonnes, to 27.9 million tonnes in the first 10 months of the year. Part of this growth stems from base effects due to a five-month blast furnace outage in the first half of 2006.
• Production growth in the Middle East remains strong, reflecting vibrant demand as the region’s economies grow. In the first ten months of 2007  production reached 5.2 million tonnes in Egypt, 8.3 million tonnes in Iran, and 3.8 million tonnes in Saudi Arabia.
  

World demand for steel

Global demand growth has decelerated in 2007, in line with declining consumption in North America and moderating trends in Europe. Consumption remains robust in the rapidly expanding emerging economies.

• The so-called BRIC economies (Brazil, Russia, India and China) are leading the growth of world demand. Chinese steel consumption reached 318 million tonnes in the first nine months of the year, up 30.8 million tonnes or 10.7% from the same period last year. Indian consumption is also increasing at a double-digit pace, though from a much lower level of around 45 million tonnes. In response to growing demand, India may have become a net importer of steel during the course of 2007. Brazilian steel demand is being fuelled by dynamic growth in steel-using industries such as construction, mechanical machinery, and automotive manufacturing. In Russia, the booming oil and gas industry and growth in household income continues to stimulate demand for steel. Steel demand in these economies is expected to continue displaying strong growth in 2008, though some moderation will be felt from the global economic slowdown.
• The European steel market is, overall, enjoying a strong year again in 2007, with real steel consumption growing in the first half of the year by 7.1% from its level a year earlier in response to strong end-user activity. Apparent consumption expanded at a faster pace, reflecting a significant increase in imports and stocks. In 2008, weaker construction activity and lower demand for investment goods should dampen steel consumption growth.
• In North America, apparent consumption is falling in response to lower automobile production, a weak housing sector, and inventory adjustments by steel service centres. Data on building permits, housing starts, and surveys of builders’ sentiment are all weak and still falling, suggesting that the housing market correction will continue. Consumption will likely remain subdued in 2008. The US slowdown is being felt in the Canadian steel market, where apparent steel consumption is down sharply this year.

Risks and long-term issues

Issues of concern at the current juncture include various economic risks, capacity and trade issues, and the price of raw materials. The length and magnitude of the US housing market downturn, and its repercussions on other markets, is of concern to the global steel industry, not only because of its direct impact on the steel-intensive construction industry but also indirectly on consumer demand for steel using goods worldwide. Global capacity is expected to continue to grow strongly, as some governments have been encouraging investments in the steel industry in order to meet growing infrastructure needs and demand from expanding industrial sectors. As capacity continues to expand, abrupt slowdowns in world demand have the potential to create trade frictions, to the detriment of the long-term health of the industry. As steel production continues to increase, raw material prices have recently risen to record highs. Despite significant investments to increase production of some raw materials, trade-distorting export restrictions and infrastructure problems in some raw material markets have the potential to lead to temporary shortages. A wave of consolidation in the mining industry is adding to steelmakers’ concerns about the cost of raw materials.

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