SteelOrbis talked to Francisco Leal, general director of Latin American Steel Association (Alacero) about economic growth forecast of Latin American countries and current conditions regarding steel industry.
Can you tell us how the Latin American steel industry has been affected by the pandemic?
In a period of global contraction much stronger than that registered following the financial crisis of 2008/09, Latin America seeks to consolidate its recovery amid a challenging economic scenario. In 2020, total crude steel production in the region was 55.6 million metric tons, which means a drop of 8.4 percent compared to the total in 2019. The steel industry is and has been fundamental for the recovery of the region, showing flexibility in its operation and focused on meeting local demand. Consumption in 2020, however, registered a decrease of 9.6 percent compared to 2019, due to the contraction of industrial activity in the months of strict confinement. Steel consumption is the main indicator that reveals how the sector is recovering, and in 2021 global demand for steel is expected to rebound.
How do you evaluate the current demand in the region? Is it back to pre-pandemic levels yet?
Steel consumption continues to grow due to the recovery in demand, the increase in the industrial production and the manufacturing index, and the replenishment of inventories both by final consumers and the distribution chain. Steel consumption in January 2021 rose for the ninth consecutive month, up 0.8 percent compared to the previous month, totaling 6.09 million tons, that is, 12.7 percent higher compared to January 2020. The level in January 2021 was comparable to the levels seen at the beginning of the Covid-19 pandemic period.
How would you describe the economic recovery of Latin America and in particular the differences in recovery among the countries of the region?
We see a gradual reactivation of productive capacity in the region, and the short-term prospects are favorable for a strengthening of regional steel demand. The International Monetary Fund (FMI) April update of its economic forecasts for this year indicates the global economy will grow by six percent, developed countries by 5.1 percent, emerging economies by 6.7 percent and Latin America by 4.6 percent. In the region, Mexico stands out with a rate of five percent and Brazil with 3.7 percent, the latter being the country that contributed the most to the improvement in the performance of steel demand, with an increase of 8.8 percent. This was its fifth consecutive month above 2 million metric tons per month, a level that had not occurred since June 2018. Argentina also registered a 10.8 percent increase in January consumption compared to December 2020. The recovery has had a “V” trend thanks to the accumulated unmet demand that was generated in the first months after the arrival of Covid-19, when the economy and, with it, the construction sector, slowed down.
Can you inform our readers about construction steel demand in the region? And in this connection, do you expect any increase in billet imports?
The construction sector today accounts for 47.2 percent of the steel consumed in our region, the same level compared to 2020. Mexico represents 47 percent of the steel consumption market based on construction, followed by Brazil with 30 percent, Colombia with eight percent, Argentina with six percent, Peru with five percent and Chile with four percent. In the last five years, there has been a gradual decrease in the share of construction in steel consumption, as in 2018 it accounted for 52 percent. In turn, we have seen growth in the participation of the automobile industry, which in 2018 represented 12 percent and today accounts for 19 percent. Nevertheless, we do see better sentiment in construction steel demand, despite the 14 percent drop in 2020 in steel consumption by the different sectors that have construction steel demand as a component , and we expect growth to be 7.5 percent in 2021, and 2.5 percent in 2022. We cannot speculate regarding billet imports; so we respectfully decline to answer this complementary question.
What is your comment on China’s cancellation of the export tax rebate for HRC? How do you think it will affect Chinese HRC exports and the global HRC market?
It will undoubtedly have a global repercussion, but it is too early to acknowledge the size of the impact, which we believe could reduce the supply from the country to our region and strengthen our domestic consumption. We understand that global overcapacity is not a problem exclusively from China, as we are now looking at this issue in other countries such as Iran, Bangladesh, Pakistan and North Korea. According to the OECD, global crude steel production capacity grew by 38.1 million metric tons or 1.6 percent, despite extremely weak market conditions. In the past two years, global capacity has increased by a total of 74.2 million metric tons, with Asia and the Middle East accounting for almost all of this growth. China continues to be an important reference in the current steel situation due to its relative weight in production, demand and trade of raw materials. The threat from China remains latent as unfair competition puts the region's steel companies at risk.
As a result of the developments in China, sharp rises in Chinese HRC prices have been seen in Latin America. Do you think the high level of prices is sustainable and when do you expect to see a correction?
As an association that represents the entire steel chain in Latin America, Alacero, since its foundation, has agreed not to address the issue of prices. Our purpose and message focuses on how to use steel to grow sustainably in the region. In this regard, Alacero has promoted new research carried out by Prof. Dr. Germano Mendes de Paula, which will be released in the short term, in which a warning is given of the risks of the competitive differences of Argentina, Brazil, Colombia and Mexico with Asian countries such as South Korea, India, Vietnam and mainly China, and of the risk that this represents for the metalworking value chain of the steel industry in Latin America. The study entitled "Competitive Differences, Deindustrialization, Chain and Steel Industry" shows how these differences in competitiveness variables such as taxation, education, logistics and financing are undermining the future of the steel industry in the region, and how it is necessary to move quickly and synergistically. Steel is one of the protagonists of the economic recovery. However, if governments allow steel to be imported from anywhere in the world, this can weaken a strategic local industry. Latin American companies in the sector have 74 antidumping actions in force in which they have reported irregular conditions in the market to regulatory entities due to the participation of importers. Of these, 49 cases concern China.
How was the first quarter of 2021 in terms of production and trade volumes?
The accumulated crude steel production up to March increased by 4.8 percent in relation to the same period in 2020, while production of rolled products registered an increase of six percent year on year in the period. Consumption until February accumulated an increase of 11.9 percent over the first two months from the same period last year. In the first quarter, the volume of exported rolled products was 25.2 percent lower compared to the same period last year, while imported volumes grew 9.3 percent year on year.
What do you expect for the remainder of the year both in terms of economic conditions and the steel industry?
The momentum of demand from the civil construction and manufacturing sectors will be maintained until the end of the year, always with the risk of new waves of Covid infections appearing before the vaccination processes are concluded. We must be attentive to the reforms that are necessary in several countries in the region. According to ECLAC, Latin America is the most indebted region in the developing world, with 79 percent of GDP committed, and the growth dynamics of 2021 will not be enough to offset the observed drop in economic activity in 2020. The World Bank reported that GDP in Latin America and the Caribbean fell 6.7 percent in 2020, and that 4.4 percent growth is expected in 2021. The IMF, on the other hand, revised upward the GDP projections for the region, from 4.1 percent projected in January to 4.6 percent as of April, and also increased its projection for the Latin American economy in 2022, from 2.9 percent to 3.1 percent. Latin American economies will grow slightly better than expected in 2021, thanks to the resumption of activity by commodity exporters, although the recovery seems uneven. The steel industry is watching the economic recovery closely.
Any final comments?
There are major challenges for sustained economic reactivation in Latin America, among which the main ones are the start of factories and the resumption of suspended projects, the economic and financial support for mitigating the effects of Covid-19, the reduction of high unemployment rates, the strengthening of public health systems and encouraging national and foreign investment, in addition to political stability and respect for the rule of law. It is important that countries focus their efforts on overcoming these problems in order to consolidate the ongoing recovery.