According to the company’s website news release on February 21, 2023, global steel production fell to 1.879 Bt in calendar 2022, –4% from the record 1.957 billion tonnes produced in calendar 2021.9 China’s production declined –2.1% YoY, with the full year finishing at 1.013 Bt, which compares to 1.035 Bt in 2021 and the 2020 figure of 1.065 Bt. Ex–China production declined –6.1% YoY to 866 Mt, with India (+5.5%, 125 Mt) the positive outlier. North America (–5.5%), Europe (–10.4%), Japan (–7.4%), South Korea (–6.5%) and the FSU/CIS (–20.1%, with Ukraine –71%) all experiencing difficult years. The year did not start well from a production point of view, with YoY contraction the norm across multiple regions in the first half. In the OECD specifically, the rate of decline accelerated in the second half.
In pig iron, the global figure for calendar 2022 of 1.301 Bt was down by –3.7% on calendar 2021’s 1.351 Bt, with a –0.8% outcome in China (864 Mt) allied to an ex–China contraction of –8.9%.
Twelve months ago, we wrote that “Our starting point for thinking about calendar 2022 is that a continuation of China’s policy stance of “zero growth”ought to be the baseline, with scenarios built around that. A fourth year above 1 billion tonnes accordingly seems likely, as the nation’s “plateau phase” extends.” That proved to be a useful guide to the full year outcome, while our ex–ante assessment that the “ultimate route to those ends will be a circuitous – and volatile – one” was a reasonable approximation of the tumultuous year that was in store. Statistically speaking, as expected there was also considerable volatility in YoY rates, reflecting the stop–start nature of production in the prior year as a well as the somewhat erratic end–use conditions that prevailed under the dual stressors of zero–COVID and weakness in the property sector.
“Our preliminary take on calendar 2023 and 2024 is that the current four–year streak of outcomes in the 1.0 to 1.1 Bt plateau range is likely to extend to five and then six. However, contrary to calendar 2022 when we moved to the lower end of the range, the next two years are likely to move us back closer to the middle of the range. For that to eventuate, the systemically vital housing sector needs to progressively leave its annus horribilis behind it.”
It also relies on the Chinese authorities adopting a more flexible disposition towards incremental annual growth than has been the case in recent years. Early indications at both a macro and micro level hint that this might be the case for a modest uplift in production – although there are no signs that a more lenient approach to capacity expansion would be countenanced (and nor do we expect any change in this regard).
China’s blast furnace (BF) utilisation rate averaged a robust 85% in the second half of calendar 2022, troughing at 79.3% in late July and peaking at 89.1% in mid–September. Average utilisation was similar to the first half of the calendar year, but period–to–period variability was lower in the second half, despite two rounds of production cuts. The first round was a voluntary phase due to loss–making, which coincided with the low point of BF utilisation in July. The second occurred late in the year, on standard winter air–quality concerns at the local level. In contrast to the second half of calendar 2021, there were no centrally mandated cuts aiming at a specific annual production goal.
Continuing the trend from the first half of calendar 2022, EAF production and profitability struggled. This was driven by two key factors (1) poor scrap feedstock availability, with collection rates collapsing during the lockdowns, and (2) weak demand for commodity construction steels amidst the downturn in housing activity. Apparent demand for long steel declined by –12% YoY in calendar 2022. EAF utilisation tracked well below the 2019–2021 range from April–2022 onwards.
Realised margins for Chinese steelmakers were poor for most of calendar 2022, with loss–making widespread. We estimate that spot margins averaged around –$20/t, not far from the 2015 figure of –$24/t just prior to the introduction of supply–side reform (SSR). The major difference between those two years is that utilisation rates for integrated BF–BOF10 operations were quite high in 2022, which historically has tended to correlate with good margins. That relationship has broken down through the pandemic era, with stop–start downstream end–use conditions contributing to much higher levels of finished steel inventories within the year, and higher associated working capital requirements for steel mills. Very high coke prices were also a consistent weight on margins, as metallurgical coal prices soared in the wake of the start of the Ukraine conflict. It will likely take some time for previously reliable correlations to become predictable again, but it is notable that finished steel inventory trends in calendar 2023 to date look closer to pre–pandemic norms than the extreme amplitude seen across 2020–2021.
Taking a step back, we note that margins averaged +$54/t from 2017–2021. Those who have followed our views for some time may recall that we argued that around two–thirds of the initial SSR boost to margins would be durable, and one–third would be transitory. The realised margins for 2017–2021 have validated that estimate.
The end–use demand picture in calendar 2022 was a combination of pronounced weakness in housing, strength in infrastructure, and soft outcomes across the wider manufacturing landscape. Key sectoral trends are discussed in detail in the Chinese economy chapter. From a steel point of view, the most important forward–looking considerations are (1) the pace, scale, and composition of the housing construction recovery, (2) the steel intensity of the same, (3) the response of machinery demand to the anticipated mix of activity in associated sectors, and (4) the tussle between slowing external demand for steel–containing goods and the needs of the domestic economy. Note that the infrastructure upswing feels well entrenched and is a solid foundation on which to build the remainder of the forecast.
On (1) and (2), we see the composition of housing activity in the first half of calendar 2023 being relatively less steel–intensive, as developers prioritise the re–start and completion of idled projects. This should begin to balance out more in the second half, as new starts begin to progressively replenish the pipeline of work, with a positive spillover into calendar 2024 anticipated. On (3), a modest upswing in construction machinery is anticipated, with any real strength likely to be back–loaded, in line with the expected composition of housing activity. Ongoing strength in power equipment is expected. On (4), weak external demand is expected to pull consumer durables down to the low single digits, with firming domestic sales preventing an outright contraction.
We estimate that net exports of steel–contained finished goods account for slightly more than 10% of Chinese apparent steel demand. That is a lower degree of external exposure than, say, Japan or Germany, where the number is about one–fifth. An additional 4% or so of Chinese production is exported directly. The direct trade surplus in steel has fluctuated widely since the pandemic began, both seasonally and year–to–year. In calendar 2022, net exports were +54 Mt, up from +41 Mt outcome in the prior year. Contrary to prior phases of the pandemic, the surplus was relatively steady across both halves. Even so, there was volatility within the year as Chinese exports helped fill a vacuum created by disruptions in the FSU, with sizeable monthly surpluses in excess of +80 Mtpa recorded in the June quarter.
Turning to the long–term, we firmly believe that, by mid–century, China will almost double its accumulated stock of steel in use, which is currently over 8 tonnes per capita, on its way to an urbanisation rate of around 80% and living standards around two–thirds of those in the United States.
China’s current stock is well below the current US level of around 12 tonnes per capita. Germany, South Korea, and Japan, which all share important points of commonality with China in terms of development strategy, industry structure, economic geography, and demography, have even higher stocks than the US.
The exact trajectory of annual production run–rates that will achieve this near doubling of the stock is uncertain. Our base case remains that Chinese steel production is in a plateau phase, with the literal peak likely to be the cyclical high achieved in this period (with 1.065 Bt in 2020 being the “clubhouse leader” in golfing terms). The plateau can be usefully thought of as a range from 1.0 to 1.1 Btpa, with cyclical and policy driven year–to–year fluctuations contained within those boundaries.
We estimate that the growing stock described above will create a flow of potential end–of–life scrap sufficient to enable a doubling of China’s current scrap–to–steel ratio of around 22% by mid–century. The official target of a scrap–to–steel ratio of 30% by 2025 is thus directionally sound, notwithstanding the fact it is more aggressive than our internal estimates by a few percentage points. Uncertainty regarding the future availability of imported scrap makes China’s official targets a little more challenging.
As we argued in our blog on regional pathways for steel decarbonisation, increasing scrap availability is a powerful lever at the Chinese steel industry’s disposal as it seeks to contribute to the national objective of carbon neutrality by 2060. Beyond the considerable passive abatement opportunities available to it, of which scrap availability is the largest, the decarbonisation choices of Chinese steel mills will be determined by the age of their integrated steel making facilities, the policy framework they are presented with, developments in the external environment impacting upon Chinese competitiveness, and the rate at which transitional and alternative steel making technologies develop.
We have noted considerable interest in the novel (for the iron–steel complex) electric–smelter furnace (ESF) from our global customers, including those in China. This interest is being turned into action as steel producers in Europe, Japan, South Korea, and Australia have now included this technology in their 2030 plans and/or longer–term decarbonisation pathways. We expect these initial projects will catalyse industry growth.
Some of the advantages of the ESF versus the more established EAF, which is designed for scrap, are its greater flexibility in accommodating medium and lower grade ores through the DRI route, and its ability to be physically incorporated into an existing integrated facility to feed a basic oxygen furnace (BOF).
Steel production outside China (hereafter ROW) initially stuttered early in calendar 2022, before falling flat in the second half. Utilisation closed the year at a weak 62% after a series of cuts across Europe and Northeast Asia. The normal pre–pandemic range was 70–75%. As mentioned above, India was a lone bright spot among the major producing regions, with +5.5% growth over calendar 2021. In the tier below, the Middle East managed respectable growth, while South America, South–east Asia and Africa were all weaker.
India’s crude steel sector has recovered strongly from the pandemic, with output in 2022 up by around +24% from the 2020 low point. It is expected to lead global growth again in calendar 2023 (in percentage terms), assisted by a concerted push on transport infrastructure in a pre–election year. In terms of new tonnes, it will contribute roughly half of the growth produced by China, on an approximate 3–to–1 ratio of percentage growth rates.
Production cuts across the OECD in the second half of calendar 2022 have established a trough for calendar 2023 first half run–rates, with a staggered re–opening anticipated across the year. Downstream demand permitting, we expect North–east Asia and North America to recover roughly half of their calendar 2022 loss across 2023, while Europe is expected to fall short of even that low threshold. By the end of calendar 2024, we expect North America to be running back above calendar 2021 levels, while Europe and North–east Asia, with their greater external exposure and underwhelming domestic growth prospects are anticipated to fall short of reclaiming that benchmark.
The aforementioned cuts reflected significant margin squeeze amidst falling steel prices and firm raw materials costs. In the immediate aftermath of the conflict commencing, according to Platts, benchmark prices in India (ex–tax), Europe, and the US had surpassed US$1000/t, US$1,500/t, and US$1,600/t respectively. It was almost one–way traffic downward between those highs and the end of the calendar year. As of end–December 2022, prices had declined to $667/t, $724/t and $772/t respectively. That reflects a modest bounce from late November/December, as production cuts enabled prices to find a bottom. We have noted that some idled BFs in Europe have already come back on–line, or had their return date announced, with some guarded optimism emerging amidst the European earnings season. The tragic earthquake in Turkey will also have an impact on Pan–European steel balances, with western and northern European mills potentially stepping into any gap created by Turkish production going offline.
Protectionism remains a feature of the ROW industry landscape, with both export and import disincentives in play across the steel value chain, with import barriers persisting despite elevated inflationary concerns.
There is also an emerging theme at the nexus of decarbonisation and protectionism: scrap nationalism. Six months ago we discussed speculation that the EU was contemplating a scrap export ban as a part of a wider approach to the domestic management of “waste”. This is no longer just a rumour.
The environmental committee of the EU parliament has voted to toughen the rules on the export of waste as defined under EU law – which includes scrap metal. Legislation is still pending. Scrap exports to non–OECD countries will be restricted, unless the destination country can demonstrate it has environmental protections in place that are aligned to EU standards.
It is important to remember that while the genesis of this debate in Europe goes back a long way, the move to accelerate action was the stark realisation in developed countries that they had essentially outsourced waste management to China. When China banned waste imports in 2017/18, the West had no plan B. This sparked a flurry of activity – some guilt about sending “dirty” waste products abroad, concerns about carbon emissions leakage, some opportunity identification in the circular economy realm, and a lobbying effort by self–interested parties – notably metal processors and recycling firms. The new waste rules are the outcome of this complex interplay.
Who likes the proposed rules? Metal processors (EU steel mills and non–ferrous operators), who will see their raw material costs lowered by the loosening of the region’s supply–demand balance in scrap markets.
Who dislikes them? (1) Recyclers and traders, who will see their margins reduced by the inability to easily arbitrage across borders. (2) Major steel scrap importers may struggle to meet the environmental criteria, which would undercut their security of supply.
Who perhaps doesn’t have a strong opinion but should? Everyone. We all have a stake in high–quality public policy decision making around the world. Note that the extent of international cooperation and coordination is an important behavioural consideration in any sophisticated 1.5–degree scenario – and the difference between a benevolent global government making these decisions, and a fragmented extreme, can be a delay of several decades in reaching net zero.11
Mandated domestic use of recyclable or recycled material creates an artificial source of friction in the global decarbonisation journey. It would be perverse if Europe, with the financial capability within the system (if not within the balance sheets of the steel industry narrowly defined) to directly pursue zero or near–zero GHG emissions end–state solutions, decided to prioritise its own access to passive abatement levers like scrap feedstock, while leaving lower income regions to adopt what they can afford: which is unlikely to be end–state technology.
Protectionism does not change how much potential scrap is available globally. At the margin though, curbing cross–border trade could impact upon how much metal is collected and recovered in natural surplus regions that impose export controls, as limiting the commercial optionality of traders and recyclers will reduce the incentive to collect. Stranding some portion of potential scrap that could be utilised in the developing world is not good decarbonisation policy.
As we are fond of saying – both because it is true and also because it serves as a timely reminder and reality check for Eurocentric views – the decarbonisation battle cannot be won in Europe alone, but it can certainly be lost in the developing world. That is particularly true of steel.
That is why we are focussing our Scope 3 research and development partnerships in steelmaking on Asia, where our five MOU partners in the region to date represent around 13½% of reported global steel production, almost 6 percentage points more than EU production combined. Unsurprisingly, their share of global pig iron production is even higher. Looking at our partners via the nations they represent rather than as standalone entities, close to 70% of crude steel production is covered and around 80% of pig iron.
Notwithstanding the above arguments that Asia should be the main point of focus, we are not standing aloof from developments in Europe. Despite its relatively small current and projected production footprint, with its ageing blast furnaces, its ambitious policy regime, vast collective financial resources and heightened societal expectations for its industrial sectors, Europe is likely to be where the first real–world visions of a decarbonised end–state for steel begin to take shape. That is partly why we have added the world’s second largest steelmaker, Arcelor Mittal, with its pan–European operational footprint, as a sixth Scope 3 partner. With the addition of Arcelor Mittal, the proportion of reported global steel production attributable to our Scope 3 research and development partners is expected to increase to around 17%.
Our approach to ranging uncertainty regarding the future pathway for steel decarbonisation remains to blend bottom–up, regional analysis leveraging our deep corporate knowledge of this sector with two other pillars of our proprietary foresight method, which are scenario analysis and framework design. The results have been discussed here and here, as part of our Pathways to Decarbonisation blog series. Where our views in relation to steel differ from others, it is often due to our differentiated regional approach, which is supplemented by the insights we glean as a key cog in both the Asian and European steel value chains.
On the topic of decarbonisation more broadly, our latest research indicates a modest net uplift in our base case for long term steel demand from the combined impacts of:
- Rising investment in the infrastructure of decarbonisation
- Lower demand from the fossil energy value chain (e.g., upstream petroleum)
We detailed this research during the WAIO site visit in October 2022.
