Global Steel Price Rally Will Be Short-Lived

Up to 30% of global steelmaking capacity (excluding China) was idled or production at steel mills significantly reduced in response to a pandemic-induced drop in demand. However, the recovery in automotive production and white goods manufacturing was quicker than expected when the strictest lockdown measures were lifted. The construction sector was less affected, as it was supported by government stimulus schemes in many regions. The restarting of steel plants was not sufficiently quick to meet growing demand, while inventory levels reduced to historical lows, with restocking across the steel value chain in Europe and the US creating additional demand. Steel prices rallied in all regions in late 2020 as a result.

However, we do not expect these levels of prices to be sustainable. Steel mills continue to restart quickly with about 30 million tonnes of hot metal capacity back on stream since October. Many idled mills in the US and EU are already in operation, although there is a time lag for production to fully ramp up. We expect prices to drop at some point in 1Q21 to levels closer to historical through-the-cycle ranges. Steelmakers are enjoying high profit margins, with CRU’s implied steel margin exceeding 30% in the EU and 45% in the US in January, although input costs are catching up. High raw material costs may temporarily support steel prices provided that steel demand is robust.

We believe that steel prices in China peaked in December 2020, when the country entered a period of seasonally lower demand, inventory levels increased and margins declined. We expect that China’s steel demand in 2021 will be marginally lower due to a smaller scope of stimulus programmes planned and a potential reduction in exports of steel-based goods.

The steel industry remains subject to various risks that could affect demand, prices and margins, including those related to the pandemic, such as a wider virus spread, slow vaccination and new strict lockdowns. Input costs will continue to affect steelmakers’ profitability and cash flows. Growing steel demand is to a large extent driven by a recovery in the automotive sector, but semiconductor shortage is a risk for a continuing demand recovery. Political and geopolitical developments, such as a reduction in government stimulus programmes, policies to cut emissions and trade wars, could increase pressure on the sector.

Given the short-term nature of the steel price rally we do not expect any fundamental changes in credit profiles of our rated issuers. We expect most excess cash flows to be used by steelmakers whose leverage is within their internal targets, including ArcelorMittal, Russian steelmakers, Gerdau and Steel Dynamics, for shareholder distributions or capex to compensate for cuts in 2020. Following a wave of M&As in the sector in the US in 2020, some producers, such as U.S. Steel and Cleveland-Cliffs, could use generated cash to reduce debt levels.