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		25 May 2020

The global steel sector is facing recovery uncertainty

Мировой стальной сектор сталкивается с неопределенностью восстановления

According to a VTB Capital study, as of May 18, the cessation of production stopped 7% of global capacity, with the exception of China. The already overloaded steel sector in Europe suffered a major blow to stops, as coronavirus spread from east to west, covering 18.9 million tons or 12% of its capacity, while 13.6 million tons or 15% of the capacity was suspended in the United States.

According to VTB Capital analysts, ArcelorMittal, the world's largest steel mill, has suspended operations from America to Asia, cutting capacity by about 24.5 million tons. According to a recent presentation, the company expects shipments to fall by 25.6% to 30.8% in the second quarter from 19.5 million tons in the first. 

While steel production in China has increased rapidly since late March, and demand has fallen, the question for the rest of the world will be how much capacity has been finally closed.

The European Steel Association, also known as Eurofer, expects EU demand to fall 10-20% in 2020 after a 5.3% decline in 2019, the worst since 2012. In the region, the observed reduction in consumption by 10% in the 4th quarter of 2019 due to a reduction in production before the pandemic hit. 

“Given that the [Purchasing Managers Index] is at a record low in Europe, visibility is still very low when recovery can actually begin, and major steel producers in Europe have already taken drastic measures in response,” writes the vice Moody's President and Analyst Getz Grossmann.

According to Grossman, the EU also faces more pressure from cheap imports than other regions. In April, European Commissioner for Trade Phil Hogan warned that steel producers could face a stream of cheap imports due to rising global stocks due to the global crisis, while the European Commission launched an investigation into the import of hot rolled flat products from Turkey in mid-May.

According to Moody's Senior Vice President and Analyst Carol Cowen, in 2020 US sales decreased by 25%, and in 2021 - by 16%. While it may take the industry at least two to three years to return to levels comparable to the past, the pandemic has also accelerated trends such as the shift to work from home, with the potential to transform the industry in the long run, according to Cowen.

In Russia, unlike the rest of Europe, there were no stops, despite the struggle with the largest number of confirmed cases of coronavirus on the continent. Inexpensive country blast furnaces will export what cannot be sold locally, said Kirill Chuiko, head of BCS Global Markets research. PJSC Magnitogorsk Iron and Steel Works, a leading Russian manufacturer, reduces domestic sales by 40-50% in May and doubles exports. According to Chuiko, only small companies operating electric arc furnaces will suffer. 

However, according to Chuiko, anti-dumping investigations are likely to follow, as Russian factories will have to sell everything at any price.

“The construction sector accounts for about 66% of the end-user demand for steel in Russia, followed by pipe manufacturers, and although the construction sector is going to hold on pretty well, it’s obvious that pipe manufacturers will suffer from [capital costs] reduced by oil and gas producers ”, Said Denis Perevezentsev, vice president and analyst at Moody's. 

Nevertheless, Russian manufacturers remain competitive, as the ruble has depreciated significantly since the beginning of the year. "They also have the opportunity to increase their share of sales in export markets, which some of them have already demonstrated in the [first quarter], and some of them will continue to increase their share of export sales in [the second and third quarter]," added Perevezentsev.

Nevertheless, Russian manufacturers remain competitive, as the ruble has depreciated significantly since the beginning of the year. 

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