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President’s market review

Despite the ongoing pandemic as well as increasing supply and material bottlenecks, the German economy recovered last year following the slump in 2020. According to initial calculations by the Federal Statistical Office, the GDP of Europe’s largest economy grew 2.7% last year.

However, the recovery is proving weaker than expected. German industry in particular is suffering massively from supply chain problems, with bottlenecks being particularly severe in the automotive industry. The passenger car market in Germany, which is an important source of new scrap, shrank 10% in 2021 owing to a lack of intermediate products. At auto industry locations across Germany, 11% fewer vehicles rolled off the production lines in December last year - the seventh consecutive month of double-digit declines in production levels.

The construction industry held its own in the pandemic and has significantly increased its economic output compared to 2019; meanwhile, foreign trade recovered in 2021 from the sharp declines of the previous year. Overall, however, the slump in economic output has not yet been recovered, partly because of the aforementioned supply and material bottlenecks.

For the first quarter of 2022, analysts expect a further decline owing to the impact of the Omicron variant. However, they also regard the subsequent outlook as basically favourable, with a strong increase anticipated for the second half of 2022.

In 2021, German crude steel production increased for the first time in three years - by 12% to 40.1 million tonnes, with scrap-rich electric steel production climbing 4.8% to 12.091 million tonnes.

For basic grades, prices for standard flat products on the German steel market fell by around Euro 200-250 per tonne from the highs reached last summer, mostly in the fourth quarter. However, current prices are still around Euro 250-350 per tonne higher than in January 2021. The main reason for the recent decline is not only the acute weakness in the automotive industry but also a significant drop in demand overall. Wire rod prices on the spot market, which is not really relevant for all grade segments, have also fallen since last summer. At around Euro 50-70 per tonne, the decline for simple grades is nowhere near as steep as for flat products.

On the German steel scrap market, new steel scrap prices climbed from Euro 254 to Euro 455 per tonne (+79%). According to the BDSV, steel mills used more scrap owing to sharp increases in iron ore prices. Although the upturn in the German economy ran out of steam at the end of 2021, the scrap price trend remained upwards in the final quarter. Demands by steel mills for lower scrap quotes are coming to nothing owing to increased export prices. As of December 31 last year, the Turkish export price for homogeneous steel scrap (heavy melting steel, HMS 1/2) was US$ 463 per tonne cfr compared to an average of US$ 287 in 2020.

The industry’s worsening supply chain problems, together with rising raw material production costs, are translating into high new scrap prices.

Germany’s industrial companies are not producing as much as they could. Former President of Ifo Hand-Werner Sinn speaks of Euro 40 billion in missing sales owing to supply chain problems and production stoppages. As a result, volumes of new scrap have decreased and the price gap between new and old scrap has widened.

Prices for HMS 1&2 (80:20 mix) recovered somewhat in the fourth quarter of 2021. However, producers in Turkey continue to face growing challenges, including the ever-plummeting Turkish lira when buying and selling domestically; in 2021, the lira lost around 80% of its value. The country’s rather idiosyncratic interest rate policy, which is unparalleled elsewhere in the world, is hitting its own population above all, as inflation continues to gather speed and create poverty by destroying livelihoods. Turkey’s domestic demand for finished steel was severely affected in the second half of 2021.

Export demand for Turkish rebar also remained weak as mills were unable to make their offers competitive in the face of higher scrap prices and rising production costs. As a result, no large volumes have been sold to regular customers in Asia over recent months.

A sharp decline in iron ore prices in 2021 was due to Chinese steel production cutbacks to save electricity and reduce the country’s CO2 emissions. However, iron ore prices picked up late in the year, with December showing a 15% increase over November levels. The gains since mid-November are the result of an improvement in Chinese steel production after the country reached its emissions reduction target for the year.