Summary
In response to the COVID-19 pandemic's impact on demand, European steelmakers had swiftly reduced supply, with first-quarter production falling 10% year over year.
With a raft of blast furnace capacity taken offline, you can expect to see iron ore demand contracting by as much as 10% in 2020, based on 2019 figures which if the case would reach its lowest level since 2009.
The slowdown in Europe is expected to result in iron ore exporters diverting more supply to the Chinese market in 2020.
Yet the battle to contain the pandemic is showing signs of success, with a number of European countries beginning to ease restrictions. On balance, we expect the June 2020 quarter to mark the bottom of the European steel production cycle in 2020, with momentum building through the second half of the year as economies reactivate and the emphasis turns to "build build build" with government stimulation packages being used as a common tool in their arsenal to prop up faltering economies.
Economic dormancy has prevailed since early March. Steel demand in Europe has been hit hard, with an acute slowdown in new business being impacted by a regional slump in manufacturing activity. Demand for steel flat products has been dented by a spate of EU-based automakers halting production lines amid the lockdown.
The automotive sector accounts for circa 20% of finished steel demand in Europe. The construction sector, the region's largest steel consumer, is experiencing its sharpest contraction in activity since the 2009 global financial crisis with Italy, Spain, Eastern Europe and the U.K. seen to be bearing the brunt of the construction slowdown.
In response to ailing demand, European steelmakers have been swift to reduce supply with EU-28 steel output plunging by 20%, or 3 Mt, year over year in March but there is a sense of cautious optimism in the air...
China's steel production was adversely affected for nearly four months from December 2019 and, thus, they started importing steel from every possible source from March 2020. Today, China are not a threat to producers in emerging markets in terms of competing for finished product sales in their home territories as the Chinese are just producing to keep up with domestic demand.
At the same time, demand from southeast Asian countries and Europe is also increasing given stimulus packages in the form of infra projects. Most European mills are trying to gear up to increase production by reducing cost and improving efficiencies. Thanks to aggressive cuts in steel supply, demand and supply appear to be well balanced, if not constrained by the supply of scrap, which is driving prices onward.
Whilst iron ore demand is expected to contract by circa 10%, or 14 Mt, year on year in 2020, we do not expect to see a significant impact on scrap pricing when considering the ongoing constrained supply.
Despite all the doom and gloom, there are reasons to be optimistic about the Q4 2020.
Significant signs of renewed activity in the manufacturing sector are appearing, with Volkswagen, BMW, Volvo and Toyota restarting shuttered capacity — albeit targeting a cautious ramp-up. As lockdown restrictions lift across Europe and governments push the "build build build" and "spend spend spend" message, we expect demand to remain intact and in fact normalise in the run up to December whereas supply is anticipated to remain at circa. 80% of pre COVID levels.
It is also worth noting that, steel prices have been supported by the swift cuts in supply.
On balance, we expect the June quarter to mark the bottom of the European steel production cycle in 2020.
Economic activity and steel supply are expected to build cautious momentum over the summer before rallying in the fourth quarter, fueled by the prospect of a better 2021 ahead.