A sharp decline in output in 2020 was followed by a steep growth which will most likely continue throughout 2021 and 2022 in the EU steel market. Most important consumers of steel such as the construction industry, automotive industry, mechanical engineering, and home appliances increased their outputs when compared to 2020. Uncertainty and risks however remain, as EU countries record growing numbers in COVID-19 cases.
The EU steel market faced a significant decline in consumption from the beginning of 2020 until June of 2020 when COVID-19 restrictions, imposed on the economy and industry, were loosened. As a result, there was a significant quarter-on-quarter output growth over the third and fourth quarter of 2020. When social measures were mostly lifted in early 2021, steel consumption took on a stronger-than-expected recovery. Even though recovery rates differ among the EU states, recovery is expected to continue throughout this and the upcoming year. Projections by EUROFER, The European Steel Association, show that the steel sector can expect a 7.9% year-on-year growth in 2021, and a further 4.5% year-on-year growth in 2022, which is significant when compared to a -10% year-on-year decline in 2020.
The steel sector is highly dependent on the construction industry as it presents approximately 35% of the entire EU steel consumption. The construction industry took a hefty decline of -4.2% in 2020. However, the activity is expected to pick up, reaching a 5.5% growth in 2021 and a 4.5% growth in 2022. Residential construction will, as always, depend on how the economic conditions and individuals’ incomes will improve. A gap in demand has already been formed when comparing the upper-segment housing market, and the lower-income segment. Former has seen a boost in demand due to work-from-home policies imposed by businesses. An important source of growth will be civil engineering, as governments will use investments in public infrastructure as a tool to boost economic recovery.
The automotive industry, accounting for 18% of the total steel EU steel consumption, had been facing a decline in output since the third quarter of 2018. In 2020, the output fell by 20%, which is the worst slump since the global financial crisis in 2009. The sector is experiencing sharp rises in output. However, these outputs are at historically low levels. Additionally, the automotive supply chain is facing impediments throughout the entire supply chain, which further jeopardize future growth. Even though if confidence is restored and demand improves, it will take time before the automotive industry reaches output levels like those in 2018. Additionally, the full recovery of the EU auto sector is highly dependent on external demand from China and the US.
The mechanical engineering sector is governed by the investment climate of businesses. As a result, output has fallen by 12.1% in 2020, when companies decided to maintain and upgrade existing machinery instead of investing in new machinery and equipment. Yet, confidence in the mechanical engineering sector has been improving since the last quarter of 2020. Growth in output of 10.6% is expected in 2021 and a growth of 3.6% is projected for 2022. Interest rates at record lows will remain a driver of steep growth.
The only sector that has seen growth in the third quarter of 2020 is the domestic appliances sector. Nevertheless, the annual output level recorded a decline of 2.8% in 2020. A strong recovery of 13.1% is expected for 2021 and marginal growth of 0.1% in 2022. Most of the growth in 2021 can be attributed to work-from-home policies when workers began to equip their home offices and upgraded their home appliances to improve the quality of life. Lastly, IoT (Internet of Things) will most likely benefit the sector by incentivizing individuals to further upgrade their home devices.
Overall, the EU steel market has recovered as output decline, caused by the pandemic, has been covered by strong growth from the last quarter of 2020 onward. Although, there is still a lot of uncertainty on how the pandemic will unwind across the EU as we enter the last quarter of 2021.
We advise companies to be diligent when conducting new business or when increasing their exposure to existing buyers due to jumps in demand and inflated prices in the steel market. Credit risk is embedded in every single transaction and should be mitigated in an efficient way. Traditional credit risk mitigation tools such as bank guarantees, LC’s and advance payments are appropriate but might not be the best tools in strong, upward markets. They put more burden on the buyer in contrast with trade credit insurance policies. Trade credit insurance enables companies on the supply side to offer their buyers trade credit and at the same time transfer credit risk to the selected insurance company. As a result, certain buyers might favour suppliers that offer trade credit, significantly increasing their competitive advantage. On top of it, suppliers might much better be able to flexibly scale cover with products complementing traditional credit insurance cover.
This article was written by the team at ALPHA CREDO
EUROFER (2021). Economic and steel market outlook 2021-2022, third quarter. Available here