worldsteel’s April 2018 Short Range Outlook (SRO) published in April delivers the good news that the growth momentum of the global steel industry will be sustained. It also highlights a few encouraging developments for the global steel industry.
Firstly, the recovery momentum in the advanced economies is expected to remain robust and, more importantly, is more investment-driven now than in the past. Investments had stayed at weak levels for almost a decade since the 2008 financial crisis.
Secondly, the recovery in the emerging economies also seems to be gaining a stronger foothold on the back of a stronger global economy, especially for those Latin American countries which had been rather slow to benefit from the upturn. Furthermore, reforms that are being implemented in many countries are expected to further strengthen their growth potentials.
However, there are two interesting anomalies in the April 2018 SRO when viewed against the strength of the global economy.
- The International Monetary Fund (IMF) and other institutions forecast the strong global economic momentum in 2018 will carry into 2019, but that global steel demand growth in 2019 is expected to decelerate compared to 2018.
- Global GDP is expected to show strong growth close to 4%, but steel demand is expected to grow much slower than GDP.
While the explanation for the first observation can be found mostly by looking at the situation in China, the second observation is more disturbing.
We know that steel is a cyclical, investment-driven commodity. For this reason, steel demand tends to fluctuate much more widely than GDP over a business cycle. Such tendency is well illustrated in the graph below:
During an economic upturn, steel demand accelerates much faster than GDP, overshooting GDP growth; during an economic downturn, steel demand decelerates much faster than GDP. But from 2016, this kind of relationship is no longer being observed:
GDP growth is accelerating, but steel demand growth fails to overshoot the GDP growth. So, let me ponder upon this.
The most obvious reason for this can be found in China, where growth of steel demand has been much lower than that of GDP since 2014. But when we examine other countries, the same phenomenon is also observed, although to a lesser degree. So, we are led to believe that this is an early manifestation of the megatrend forces that the steel industry is facing. The most important of these, which is expected to have a far-reaching impact over a long period of time, is believed to be the circular economy trend.
Implementation of circular economy principles within our society is just at an early-stage now and its wider application will affect steel demand in many fundamental ways; through recycling, sharing, reuse, and remanufacturing practices. All this will make the link between steel demand and economic activities weaker in the future. We experienced a similar situation in the past: following the oil shocks of the mid 70’s, the rise in energy prices and resulting energy saving efforts led to a lasting decline of steel use per GDP.
However, the steel industry was able to respond to such structural change by being innovative – the creation of lighter but stronger steels.
Is it time for another mega innovation of the steel industry to meet the new challenge?