Recovery now unlikely before end of first quarter 2024
The global economy weakened further in the third quarter, particularly in the Eurozone which is facing a renewed recession. The German economy, which has the greatest weight in the monetary union, is suffering from a sharp decline in industrial activity as well as weak construction levels.
In order to lower inflation and stabilize the Turkish lira, Turkey’s central bank has significantly tightened its monetary policy and raised interest rates. At the same time, the new ministers of finance and economy have taken a series of fiscal measures designed to dampen growth but improve macro-economic stability. These measures are a correction to the economic policies of the earlier government, which had led to high debt, a large current account deficit and a sharp depreciation of the lira.
The economic situation in China has not improved as hoped, despite the measures that have been taken. Markets continue to be disappointed and concerned about a struggling real estate sector which is suffering from high debt levels. According to Bloomberg, Chinese real estate developers are facing a liquidity problem amounting to around 19 trillion yuan - or 15% of GDP - which could lead to a severe crisis by the end of the year. The real estate sector is central to the Chinese economy as an estimated 70% of household wealth is invested in it.
Continuing high inflation in the world’s major economies poses another challenge. To combat this, major central banks have sharply raised key interest rates and signalled their intention to continue with this approach if inflation cannot be contained. However, this has inevitably had a negative impact on private consumption and investment in construction, both of which are important drivers of economic growth.
The global crude steel industry recorded a slight increase in output of 0.2% in the first eight months of this year when compared with the same period in 2022. This growth was mainly driven by four countries - China, India, Russia and Iran - which increased their production. The remaining six countries among the top 10 producers recorded declines in output, with Turkey and Brazil suffering the sharpest drops of 12.1% and 8.3%, respectively. Germany produced 4.2% less crude steel during this year’s January-August period in reaching a total of 24.3 million tonnes.
Recycled steel price quotations in Europe and Turkey showed little change in the third quarter. Low steel demand had a negative impact on mill profitability and reduced raw material requirements. Export prices improved slightly in August as demand picked up from South Asia, with Turkish mills having to raise their prices to secure supplies. The Turkish market offered some sales opportunities for semi-finished and finished products but the export market remained well below year-earlier levels.
Recycled steel dealers in Germany suffered further price falls in August, continuing the downward trend of recent months. Weak demand for semi-finished and finished steel products - particularly reinforcing steel - hit electric steel mills particularly hard. Lower sales opportunities among consumers, together with a seasonal market slowdown, resulted in lower recycled steel demand. Thanks to a further revival of the export market, the price decline in Germany was halted. Price stabilization was supported by the low availability of new and old recycled steel.
Prices on the world markets increased, mainly owing to buying interest from India, Pakistan and Bangladesh. Turkish consumers therefore had to increase their stocks at higher prices in September despite limited sales opportunities on the domestic and export markets. Steel producers have tried to keep their purchases of deep-sea recycled steel to a minimum as the economic downturn in Turkey has severely affected the country’s construction and steel sectors.
The outlook for the final quarter is bleak. While the Chinese economy appears to have bottomed out in August, the real estate crisis is far from over. The high level of debt among construction companies and the limited room for manoeuvre for the Chinese government make the situation difficult. Chinese steel mills have not yet reduced their production and so the world market is being flooded with the country’s finished steel.
The Turkish market has been struggling with a large trade deficit since the previous quarter. In addition, energy prices have increased by 20% as of the new quarter. The changes in the energy sector will have a significant impact on the steel industry, which is already suffering from weak demand and the influx of foreign material. This will further aggravate the situation, causing finished steel prices to deviate ever further from competitive levels. Unfortunately, no improvement is expected in Germany or the rest of Europe. While hope dies last, a recovery is unlikely until the end of the first quarter of 2024.