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Policy Developments to Shape Global Steel Markets in 2020 - Wood Mackenzie

Steel News - Published on Thu, 23 Jan 2020

Image Source: woodmac.com
According to Wood Mackenzie, Chinese steel demand will likely peak this year at 890 million tonnes, a growth of 1.5% and with China responsible for half of global steel demand, Chinese government policy remains core to Wood Mackenzie’s view. Wood Mackenzie does not expect the government to ease control of this sector, however if economic pressure rises, stimulus in this area is potentially an easy route to boost GDP and meet targets. An unexpected stimulus in property would lift steel demand and, ultimately, prices.

Aside from Chinese demand, what are the biggest trends to watch in global steel market in 2020? Alex Griffiths, Wood Mackenzie Principal Analyst, sees five key themes:
Government environmental policy decisions taken in the EU and North America have the potential to shape steel markets for decades
Capacity deletions in the west – expect more closures in the EU and additions in the east
M&A and heightened corporate activity
Many variables could support iron ore prices and steelmaking costs - alongside our view of declining steel prices, higher costs would mean tighter margins
India – the government has big plans but has failed to deliver in the past. Could 2020 be India’s year?

Policy developments in 2020 have the potential to disrupt steel markets. Protectionism is the common theme and announcements this year may lead to increasingly regionalised steel markets in the long term. Mr Griffiths said “The European Commission will seek to get member states’ approval of its European Green Deal in 2020. The policy is unlikely to roll out until the mid-2020s but is likely to include a carbon border tax on steel imports. If approved, expect steelmakers, traders and consumers to begin tweaking long-term strategies. Despite launching a nationwide carbon trading system in December 2017, carbon emissions are not yet the priority for the Chinese steel industry. In 2020, air quality will remain the focus and steelmakers will be pushed to achieve ultra-low emission standards on dust, SO2 and NOx emissions.”

The USMCA trade agreement may be approved this year, which would provide upside risk to Wood Mackenzie’s forecast. Mr Griffiths said “The deal will require 40% of a car’s value to be manufactured in North American facilities where salaried workers receive at least $16 an hour. The salary aspect could effectively force automakers to source steel from the US or Canada and provide a boost to steel output in those countries.”

In response to the US Section 232 tariffs on steel imports, Europe introduced safeguarding measures last year. In 2020, safeguarding measures will add to import volatility as buyers’ understanding of the rules matures. The UK will leave the EU this year, however during the transition period that will span the whole of 2020, the terms of trade will not change. As details of the future trading relationship emerge, markets will see a response. However, Wood Mackenzie remains unconvinced that the UK’s steel industry will be prioritised during Brexit negotiations.

Wood Mackenzie expects to see steel capacity additions in the east and depletions in the west. Mr Griffiths said “In the EU, we have identified 4.6 Mtpa of capacity all but certain to idle in 2020. A further 2.1 Mtpa is at high risk of curtailment this year. Last year, more responsive EAF facilities bore the brunt of output declines. However, this year we expect hot metal production to lose out as high raw materials costs and an increasing environmental focus bite into margins. The most exposed are distressed assets or those with downstream facilities suffering curtailments. Turkey has capacity expansion plans this year despite subdued domestic demand and challenges in traditional export markets. Expansions hinge on government support, both directly and via increased steel demand from large-scale infrastructure projects. In China, returned capacity via the ongoing capacity swap scheme from previously closed facilities is likely to add more pressure to steelmaking margins. Expect a net increase of 18 Mtpa of steelmaking capacity this year, with 70% of that EAF based. This is likely to result in a lower capacity utilisation rate (particularly for EAFs) and therefore a lower steelmaking margin. Furthermore, if domestic demand growth cannot keep pace with capacity increases, expect China to export more steel than forecast.”

Mr Griffiths said “We predict a higher steel production growth this year when compared to the <2% growth experienced in 2019, however gains will remain modest.”

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Posted By : Rabi Wangkhem on Thu, 23 Jan 2020
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