Fitch Ratings Global Steel Outlook Is Negative on Looming Overcapacity
Muted global steel demand growth and increasing supply linked to earlier investments in capacity will continue to weigh on the industry in 2020, Fitch Ratings says. While we expect a moderate recovery in the coming 12 months, the impact already seen on steelmakers' capacity utilisation and margins, particularly in Europe, and persistent downside risks led to the negative sector outlook. Downside risks are linked to geopolitical tensions and political uncertainty in some countries, as well as progressive environmental reforms in China coinciding with a managed slowdown of growth ambitions.
Steel companies proceeded with investments to increase capacity and/or debottleneck existing assets over 2017-2018, which were highly profitable years for the industry. These capacity additions and upgrades were initiated before trade tensions started affecting growth at the beginning of 2019. However, as economic conditions have weakened in 2019, supply expansion is now running ahead of demand growth. Many producers have increased exports to maintain output and counteract weak domestic demand. But countries that typically are net importers, including the US and some countries in southeast Asia, have expanded production and are also experiencing weak sentiment and lower economic growth.
Oversupply looms large. Steel margins remain low and producers in some regions are now assessing options to curtail capacity. That is easier in regions with sufficient electric arc furnace (EAF) capacity (for example North America), as costs associated with idling production are lower than for the blast furnace route. As a result, the adjustment is more difficult and costly in Europe where the share of EAF capacity is low. Although some production cuts have been made, CRU believes more are needed in Europe before margins can materially recover.
We anticipate the main steel-consuming sectors in western Europe will remain under pressure in 2020. The auto sector is likely to see a low-single-digit decline in new vehicle sales due to structural changes, including uncertain electric vehicle adoption rates, and cyclical weaknesses. However, we expect incremental demand in construction and mechanical engineering. We forecast overall demand growth of around 1%, an improvement from a 4% decline projected in 2019. Trade tensions and Brexit uncertainty add to downside risks. Upside could come from fiscal stimulus.
The full implementation of a 6% European steel supply cut towards end-2019 (announced and partially executed) could help rebalance the market. As a result of temporary capacity curtailments and decreasing raw material prices we expect steel margins on average to improve in 2020 from the lows experienced in 2H19. However, carbon prices increased significantly in 2018-2019, and CO2 has become an important marginal cost item in EU steelmakers' cost structures. As a result, the modelled EBITDA margin is forecast to be negative in 2020 for production not covered by free CO2 allowances.
Source : Strategic Research Institute