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Recovery stalls after optimistic start to 2023

After a very difficult 2022, the economic outlook for 2023 was seen as quite optimistic. On the global steel markets, the combination of the Chinese government’s announced departure from its zero-COVID policy and of its stimulus measures further boosted hopes of an improvement in the economy.

The International Monetary Fund (IMF) is forecasting global growth of 2.9% for 2023. However, thanks to lower-than-expected energy prices, US and Eurozone economies proved much more robust than expected following the declines of the previous year, thus explaining the numerous upward revisions to GDP projections: compared to October last year, the IMF’s growth forecasts for 2023 have been raised from 1% to 1.4% for the USA, from 0.5% to 0.7% for the Eurozone, and from 4.4% to 5.2% for China.

Spurred by these positive assessments, world market prices for steel rose significantly in the first quarter of this year, linked both to the tightening of recycled steel supplies and to the sharp rise in iron ore prices. In China, iron ore prices climbed to US$ 130 per tonne, pushing import prices for HMS 1&2 (80:20) cfr Turkey to US$ 460 per tonne at their peak. As the largest importer of recycled steel, Turkey was forced to raise its purchase prices in response to competition from Asia, even though exports of Turkish steel products were already declining. The price increase was also boosted by the reduction in energy prices in Turkey, which allowed the country’s steel producers to keep their margins at a relatively high level. Prices in Germany and neighbouring countries followed the export market’s lead, but demand from the domestic steel industry was below average owing to a weak construction sector and only slowly easing supply chain problems in the auto industry. There could be no talk of euphoria among steel producers.

At the beginning of February, severe earthquakes shook Turkey and brought renewed uncertainty to the sector. The Kahramanmaras region in south east Turkey was hit by earthquakes of magnitude 7.6 and 7.7 on February 6, damaging the port of Iskenderun and disrupting power supplies and logistics. There was a 28.9% year-on-year decline in Turkish steel production in February to 2.1 million tonnes as a result of production cuts at steel mills in the Iskenderun and Osmaniye regions, which account for around 32% of the country’s crude steel capacity. Despite this, prices for recycled steel remained relatively stable as exporters did not expect a sharp drop in recycled steel demand.

However, towards the end of the quarter, the basis for the increase in recycled steel prices became significantly undermined for a number of reasons: the expected revival in Chinese demand did not materialize; the real estate market failed to achieve the hoped-for turnaround; and owing partly to weather conditions as well as buyer restraint, the construction recovery in China was delayed. Chinese steel mills, which had significantly increased production in anticipation of an improvement, were forced to sell their steel on the export market.

Reconstruction in Turkey also stalled following delays caused by the forthcoming parliamentary elections and growing criticism of the pricing policies of Turkish steel mills. Added to this is the continuing devaluation pressure on the Turkish lira which is likely to make it even more difficult for domestic steel mills to import recycled steel.

In Europe, there has been encouraging news from the auto industry but the construction sector remains the steel industry’s problem customer. In anticipation of further interest rate increases by the European Central Bank, housing construction in particular is likely to fall well short of expectations.