The outlook for the steel sector remains weak with many uncertainties including the pace of world economic growth, geopolitical tensions, the future evolution of oil and raw material markets, the long-term decline in Chinese steel demand and the impacts of excess steelmaking capacity, according to industry and government officials at the OECD’s Steel Committee meeting in Paris on 11-12 May 2015 .

Statement from Risaburo Nezu, Chairman of the OECD Steel Committee

The Committee:

• Exchanged views on the slow growth prospects of the global steel market and risks surrounding the outlook;
• Discussed new information on public financial support measures for new steelmaking capacity and agreed to continue examining government interventions, such as public financial support measures that contribute to new steelmaking capacity or to maintaining economically inefficient capacities;
• Highlighted the need to address the key priority of the excess capacity challenge with a sense of urgency and called for further work;
•  encouraged state owned and controlled banks, public financial institutions and state development funds to take more careful account of the current excess capacity situation in their decisions.
• Heard presentations on strategic policies for the steel industry followed in different economies and decided to prepare a compendium which will serve as a regularly updated tool describing these policies and their implementation in various steel producing economies;
• Heard presentations about the strong increase in exports and market deterioration affecting many of the participating economies;
• Learned that China’s steel demand appears to have peaked with implications for high continued levels of excess capacity on global markets for an extended period of time;
• Noted the rise of trade frictions in steel trade and discussed the importance of a level playing field for the health of the global steel industry;
• Exchanged views on the innovation and productivity performance of the steel industry; and
• Took note of the industry’s efforts to increase energy efficiency and highlighted the importance of continuing to incrementally adopt best-available practices and technologies as well as pursuing innovation to help mitigate climate change and improve energy and environmental performance.
  
  

Growth in global apparent steel use has nearly come to a halt

According to the OECD’s March 2015 Interim Economic Assessment, the effects of lower oil prices and monetary policy easing have led to a slight improvement in economic growth prospects in the major economies, but the near-term outlook is still one of reduced, rather than rapid, world GDP growth.  Moderate economic growth, with real investment still sluggish, is also impacting global steel markets. Global crude steel production grew by only 1.0% in 2014, driven by China’s slowdown and modest growth in developed economies. In the first quarter of 2015, global crude steel production decreased by 1.8%, year-on-year, to 1 622.4 mmt in annualised terms. Chinese crude steel production in the first quarter of 2015 fell by 1.7%, reaching 811.5 mmt in annualised terms. In the rest of the world, crude steel production was 810.8 mmt in the first quarter of 2015, in annualised terms, down 1.9% compared to the previous year.

After growing 0.6% in 2014, global apparent steel use (of finished steel products) is expected to grow by only 0.5% to 1 544.4 mmt in 2015 and by 1.4% to 1 565.5 mmt in 2016, reflecting the contraction of China’s steel demand and only very limited demand growth in many emerging and advanced economies.[1] Steel demand in North America is projected to decline 0.9% in 2015. Steel demand growth will remain weak especially in the Commonwealth of Independent States (CIS) and in Central and South America, while India and Southeast Asian economies will perform better. Steel demand in the Middle East and North Africa region should also perform relatively well, though oil price developments and political instabilities are downside risks to the outlook.  

The outlook for the steel sector remains weak with many uncertainties including the pace of world economic growth, geopolitical tensions, the future evolution of oil and raw material markets, the long-term decline in Chinese steel demand and the impacts of excess steelmaking capacity. Delegates discussed whether the steel industry might be entering a long-term period of low demand growth, with implications for trade, overcapacity, and competitiveness. The potential for future steel demand growth could be constrained due to a globally aging population, inter-material competition, and more efficient use of steel. Faced with low global growth and little expectation that China’s growth will return to high levels, a focus on creating value instead of volume could help the industry capture opportunities arising from many long-term structural changes.

New capacity expansion projects are taking place, often involving government financial support

Following the Ministerial Council Meeting in 2014, where Ministers stressed the need to address the excess capacity challenge, it remains a key priority for the Committee as it risks the industry’s long-term viability and efficiency.[2] In the context of slowing steel demand growth, it is important to ensure that new investments in steelmaking capacity will be sustainable in the long term. The Committee discussed research showing that crude steelmaking production capacities are being augmented further in certain regions of the world, despite large over-supply of the market.

A fair share of these expansion projects are potentially financed with the support of governments, either of the home economy or the economy where the project is being executed. Financial support is often in the form of loans from state-owned banks, public financial institutions such as export-import credit agencies, or state development funds. Investment projects may also involve funding support from government institutions of overseas economies, whereas terms and conditions of foreign government-related financial institutions are not apparently clear.

The Committee discussed the motivation for these investments and financial supports. There are growing concerns regarding financial support of domestic and overseas capacity expansions, and the Committee stressed the urgency of limiting government measures that artificially support further expansion of steelmaking capacity. In this context, the Committee encourages state owned and controlled banks, public financial institutions and state development funds to take more careful account of the current excess capacity situation in their decisions. Steel investments are long-lived and, once in place, capacity adjusts slowly to new market conditions, especially when governments intervene to sustain such capacity or fail to promote market-driven adjustment policies. Delegates discussed lessons from past experiences that may still be relevant to today’s situation: trade-distorting practices and policies, overly optimistic demand forecasts and the durable nature of steel plants and equipment, together with an inadequate regulatory setting that can act as important barriers to exit.

In light of the possible sustained slowdown in global steel consumption in the future, excess capacity will remain a central challenge for the steel industry. Excess capacity in certain markets is leading to significant export increases which in turn have resulted in plant closures and job losses elsewhere. Understanding how government policies influence investments in new steelmaking capacity and the maintenance of economically inefficient capacities remains a key priority for the Steel Committee. Participants agreed to continue working together to better understand the extent to which such government policies can have market-distorting features that are contributing to new capacity expansion or slowing the closure of uneconomic capacity, as well as various trade and investment barriers that can slow needed industry restructuring. Members continue to work towards common perspectives about policy approaches that would help reduce structural imbalances in the global steel industry and have long-lasting positive impacts on the industry’s viability.

Trade and trade policies

There are a number of trade frictions involving steel. Steel related complaints account for as much as 25% of the total number of complaints brought to the WTO in recent years. This is partly because the steel industry is experiencing an increase in trade policy measures that are either closing domestic markets to trade or stimulating exports through government-supported export incentives. Many of the trade-distorting measures taken since the financial crisis are still in place, and some economies are taking action to offset or remedy unfair trade practices that are causing injury to their domestic industries. Beggar-thy-neighbour policies that can result in long-lasting negative impacts for the global steel industry should be avoided, particularly in the current era of weak market conditions. Members discussed the importance of examining ways to address the root causes of trade problems in steel, with a view to supporting fair competition in steel trade and thereby reducing the need to resort to trade defence instruments, thus strengthening the preconditions for growth in the global steel industry. Concerns were raised that a failure to address or halt market distortions will result in subsidised and state-supported enterprises surviving at the expense of efficient companies operating in environments with minimal government support.

Granting advantages to enterprises can also be a source of trade distortion. Participants discussed the importance of avoiding cases where state owned or controlled enterprises influence competition in international markets. The Steel Committee will continue to work towards a level-playing field in steel markets and further explore the implications of state owned or controlled enterprises upon trade and steelmaking capacity developments.

The steel industry has been making important efforts to innovate, but challenges remain

In a context of low profitability of the steel industry, the amount of financial resources that are available to invest in innovation are scarce and should be soundly used. The industry could realise large long-term benefits from investments into the research and development of new technologies and improved production processes, particularly those that can result in increased efficiency and productivity growth. New evidence discussed by the Committee on productivity levels of steelmaking companies reveals important challenges that may need to be addressed to ensure the sustainability of the steel sector. In particular, it raises concerns on whether high barriers to exit might be in place in some economies, limiting the scope for market forces to determine the allocation of resources.

Technological advances and innovation have played a crucial role in the steel industry, helping to boost productivity growth through continuous improvements in production processes and the introduction of higher quality and value-added steel products. Innovation also has important implications for the steel trade structures of economies. The steel industry has been making significant efforts to innovate and to improve its environmental performance. There is, however, room for improvement to explore, notably in terms of developing a breakthrough steelmaking technology that, while boosting productivity growth, could also contribute to addressing pressing environmental challenges.

Environmental performance: much has been done, but further efforts are needed

Progress on low-carbon industrial innovation over the next decade is crucial. The iron and steel sector accounts for about 22% of total industrial energy use and 31% of industrial direct CO₂ emissions. Further integrating carbon capture and storage, improving resource efficiency, reusing industrial wastes and diversifying product applications are important goals for the steel industry. Economic and policy uncertainty, and the need to manage risk and maintain competitive advantage, can create substantial challenges to technological progress.

Energy efficiency can help address climate change challenges and increase industrial productivity. The steel industry is very engaged in energy efficiency and is implementing energy efficiency best-available practices and technologies progressively. The Committee discussed a variety of energy efficiency tools as well as mechanisms that could be applied by governments to support and industry to achieve the implementation of energy efficiency management systems. The Steel Committee also agreed that joint industry-government collaboration is needed to further improve the energy and environmental performance of the steel sector.