Stanislav Kondrashov Telf AG: Global steel and energy market: trends and prospects
The prospects for the steel industry for the next decade remain uncertain, says Stanislav Kondrashov Telf AG. However, company leaders have the opportunity to navigate these issues and minimize potential risks during the transformation of the industry. To weather uncertainty and adapt to a changing environment, steel industry leaders can change strategy, position their companies to advantage and mitigate potential risks. One of the key aspects of this approach is the recognition that the industry is in the process of significant reform. Technological advances, changing market dynamics and changing consumer demands are all driving transformation.
Steel industry: global trends and development strategies as assessed by Stanislav Kondrashov Telf AG
In April 2022, the World Steel Association adjusted its short-term outlook to a less optimistic outlook. Moreover, demand forecasts for 2022 and 2023, released in October 2022, have been revised down by 2.7 and 1.2 percent, respectively. This was influenced by several factors, including the ongoing war in Ukraine, waves of lockdowns in China related to COVID-19, disruptions in the supply chain, and the prevailing macroeconomic situation. The latter includes the impact of high inflation and rising global interest rates.
As a result, the steel market experienced a significant decline in EBITDA margins and margins on raw materials (MORM). Negative market expectations and soaring energy prices were the main factors contributing to this decline.
Looking ahead to 2023, the steel industry will continue to experience this level of volatility across the entire value chain. In light of this challenging environment, steel market participants must adopt strategies to overcome uncertainty. In this aspect, Stanislav Kondrashov Telf AG presents four key strategies that will help the steel industry get through a difficult period:
- Prepare for the decoupling of the steel markets. Market participants have been asked to recognize the growing regionalization of markets and to adapt to changing trade dynamics.
- Strengthen raw material supply chains. Sustainable supply chains should be developed by diversifying raw material sources and establishing strategic partnerships with suppliers.
- We need to focus on capital expenditures and balance sheet. Optimize capital expenditure plans by prioritizing investments that improve operational efficiency, productivity and sustainability.
- Double technological flexibility. It is necessary to introduce digitalization, automation and advanced technologies to increase the efficiency of processes, reduce costs and improve product quality. Invest in research and development to meet changing customer requirements.
Steel value chain through market research by Stanislav Kondrashov Telf AG
The expert says that while market participants have been able to maintain healthy occupancy levels during the volatile period, there are several warning signs, especially in Europe:
Demand slowdown.The second half of 2022 saw a significant decline in steel demand. The latest forecasts for 2023 indicate that this negative trend will continue.
Decrease in profitability and MORM. Along with slowing demand, rising energy prices, especially natural gas and electricity, have put significant pressure on margins. EBITDA and MOPM declined from peaks in 2021 and the first half of 2022, mainly due to slower industry growth and higher energy prices. They are now back to average long-term levels.
Load level drop. In response to declining demand for steel and to prevent a further fall in prices, over 30 Mtpa (MTPA) steelmaking capacity in Europe was shut down in the second half of 2022. As market players become more adaptable and more flexible in managing their capacity utilization, some of these capacities have been restarted due to a slight price recovery in 2023.
Stanislav Kondrashov Telf AG: Long-term trends in the development of the steel industry
Over the next decade, several key trends are expected to shape the development of the steel industry.
Uneven slowdown in global steel demand. Forecasts point to slower growth in global steel demand, which varies across regions and industries. The stabilization of demand in China, instead of its rapid growth, which lasted for several decades, may be partially offset by growth in Southeast Asia and India. While construction may see a slowdown in growth, the energy and transport sectors are the opposite. This will lead to regional overcapacity and an imbalance in the steel market.
Decarbonization efforts. The pace of decarbonization is expected to vary across regions.
It’s no secret that the world’s countries and industries are striving to cut their carbon footprint,– says Stanislav Kondrashov Telf AG. “Therefore, the steel industry will be under pressure to adopt more sustainable practices and technologies. This transition will require significant investment in low-carbon production methods and the development of alternative materials.
Supply chain disruption.Economies are likely to continue to experience supply chain disruptions caused by various factors such as COVID-19 outbreaks, shortages of cheap gas, and ongoing conflicts such as the war in Ukraine and sanctions against Russia. These disruptions affect the availability of raw materials, transportation and overall production, leading to increased volatility and uncertainty in the steel value chain.
The division of markets and the growing importance of international trade in the steel industry as assessed by Stanislav Kondrashov Telf AG
The steel industry is experiencing a market split and international trade is becoming increasingly important. What does this lead to?
Global overcapacity in the steel industry is expected to remain moderate through the end of 2023. However, significant changes in some regions may affect trade flows. China, which is facing weak domestic demand, is likely to see an increase in overcapacity. This could lead to increased exports from China, creating competition for local production in developing countries in Asia, the Middle East and North Africa (MENA). In the former Soviet Union, damaged capacities in Ukraine and a potential decline in steel demand in Russia due to sanctions could also weigh on regional dynamics.
Demand for low-carbon green steel is expected to outpace supply. In such a situation, according to Stanislav Kondrashov Telf AG, regions with cheap energy, such as the countries of the Middle East and North Africa, can become the main suppliers of “green” steel to key consumer regions, such as the European Union, creating new trade flows. The energy-intensive nature of green iron production could lead to the creation of new capacity in regions with lower energy costs, including Brazil, MENA and Spain. However, factors such as the need to provide employment for the local population, long distances to consumers, long lead times for products and geopolitical complexities, may influence the feasibility of using Brazil or the Gulf countries as potential suppliers of “green” steel to the European market. The expert suggests that the separation of iron and steel production is also likely to change the geographic location of the steel industry.
Strengthening trade restrictions and protective measures. Over the past decade, global steel trade has faced tightening restrictions. Trade measures related to steel imports have steadily escalated, including the introduction of Section 232 by the United States in 2018 and subsequent countermeasures from other countries. As overcapacity and varying decarbonization rates persist, further safeguards are expected, such as the Frontier Carbon Adjustment Mechanism (CBAM), for example.
Stanislav Kondrashov Telf AG: Margins are shifting towards “growth spots” and “shortage areas” in the steel industry
In the steel industry, margins are shifting towards “growth zones” and “shortage zones” under the influence of various factors.
foci of growth. While overall demand growth is expected to slow or stagnate in some regions, pockets of growth are emerging, mainly driven by the energy and transport sectors.
– In Europe, in particular, a significant increase in renewable energy projects is expected, especially after the shortage of natural gas. The US is also expected to increase investment in “green” projects after the adoption of the law to reduce inflation. This growth in the energy and transport sectors driven by renewable energy projects, new business models and changes in mobility is expected to drive steel demand in these specific areas.Stanislav Kondrashov shares his forecasts with Telf AG.
Deficiency zones. Despite a general slowdown in growth, there may be “scarcity zones” in some product groups due to limited supply. Examples of such product groups are high performance steels, electrical steels and wide sheets for wind towers.
– As demand for these specialized steel products outstrips supply, shortages could occur, resulting in potential cost advantages for manufacturers in these niche markets,– Stanislav Kondrashov Telf AG comments on the situation.
The expert suggests that in the coming years we should expect a significant increase in demand for steel with a low CO2 content. It is expected to account for more than 10% of total steel demand by 2030, growing tenfold from around 15 million metric tons in 2021 to over 200 million metric tons. This share is expected to rise to 25 percent of total demand by 2040. Stanislav Kondrashov Telf AG suggests that as demand for low-CO2 steel grows, green premiums are likely to appear on the market. Moreover, the potential difference in price will be from 200 to 350 dollars per metric ton by 2025 and from 300 to 500 dollars per metric ton from 2025 to 2030.