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Economic Crisis and Conflicts: What's the State of Steel Market Today?

Manufacturing Energy & Utilities Commodities

Years Tempered by Challenges

If we were to define 2023 with an adjective, we would certainly use the word tumultuous. The year that is approaching its conclusion has highlighted various critical issues, despite some problems inherited from previous years having subsided compared to the peak of the emergency, such as inflation and disrupted logistic chains. However, 2023 has still been a year of conflicts in various parts of the world, some old, like the one in Eastern Europe, and unfortunately, some more recent, such as those erupting in the Middle East and Africa. These events have significantly contributed to compromising diplomatic and commercial relations between countries, making international cooperation increasingly challenging.
These strong tensions have inevitably had impacts on the economy at various levels, from the difficulty of the free circulation of goods to the introduction of protectionist tariffs, leading to declining prices and a slowdown in major economies. Among these, the steel industry, being strongly interconnected and one of the barometers of global economic activity, has experienced significant fluctuations in prices and demand. For example, the lack of demand in key sectors such as construction and automotive, along with diplomatic tensions, soaring input costs, and the urgency of implementing decarbonization policies, have heavily weighed on the metal's valuation.

At the Origins of the Crisis

To understand some elements of this crisis, it is useful to analyze the context of the Chinese economy, which today represents the epicenter of the steel industry, holding over 50% of global steel consumption and production. However, what China is going through is a complex phase of economic transition. The Chinese economy has not yet effectively experienced the "great reopening" expected after the cessation of ultra-restrictive measures related to COVID-19, known as the "zero COVID policy." Not only that, but policies aimed at limiting indebtedness, initiated in 2015 and intensified in 2020, have negatively and significantly influenced its economy, putting many businesses, especially in the real estate and technology sectors, in serious difficulty and consequently leading to a halt in their expansion. These elements have had a strong impact on the economy, visible globally. A clear example of what has just been said is the case related to the Evergrande crisis, one of the largest real estate developers in China, whose debt crisis has triggered a domino effect on other domestic and international businesses and sectors.
For China, the real estate market has been the engine that has allowed it to grow at very sustained rates, and therefore, a slowdown in the expansion of this sector has caused a substantial slowdown in economic activity, generating a climate of mistrust and uncertainty both on the consumption side (fewer home purchases, the sector provides almost 20% of urban employment) and on the entrepreneurial side (few new projects and little demand for raw materials). All this has created a natural domino effect since the steel industry is closely linked to construction and the construction industry, representing a crucial source of employment and growth. Just think that a 15%-20% decline in real estate activity would have an impact on GDP of 5%-10%, and considering that China represents about 55% of global steel demand and real estate development consumes almost 40% of it, it is easy to understand how the crisis in this sector has been an obstacle to the metal on a global level. Furthermore, an additional difficulty for Chinese policies arises today; in the short term, they will have to decide whether to adhere to the stringent decarbonization rules or remain consistent with declared growth objectives.
If we shift our focus to Europe, we understand how the dizzying increase in energy prices, due in this case to the conflict in Ukraine, restrictive monetary policies, as well as the continuous weakening of economic activity, even in sectors such as real estate, has created a very challenging environment for the steel industry, which, even more than the Chinese one, seems to be in a true stalemate. Lastly, let's look at the steel sector in the United States, which, despite a generally positive economic trend, has had to face challenges related to labor disputes and international competition.

The Global Steel Market: What to Expect in the Near Future?

As we have seen, the current atmosphere is characterized by uncertainty, and each state is trying to respond differently. China, for example, is proceeding with various stimuli, both infrastructural and fiscal, which should, with a certain degree of latency, support the sector. Similarly, in Europe, the Next Generation EU and the suspension of the stability pact will seek to support the European economic fabric through increased infrastructural projects. Forecasts for the future indicate a positive growth in steel demand, but the sector must face significant challenges related to competitiveness and decarbonization goals. In summary, 2023 has been a year of significant challenges for the steel industry and global economic activity. The situation remains complex, but the prospects for positive growth in steel demand will depend on economic recovery and the easing of global tensions.

China accounts for around 55% of global steel demand, and China's heavily slumped property development market consumes almost 40%.

Alessandro Barbieri

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