Alacero: Expectation of a real regional recovery for mid-2022 should only occur from this year

Thursday, 05 January 2023 17:58:16 (GMT+3)   |   Istanbul

SteelOrbis talked to Latin American Steel Association (Alacero) regarding 2022 evaluations and 2023 expectations

How was 2022 for the steel industry and global markets? 

Economic activity in Latin America and the Caribbean entered the third year of the Covid-19 pandemic with growth expectations. According to the International Monetary Fund (IMF), GDP growth in the region should close at 3.5 percent in 2022, after an increase of 6.9 percent in 2021. The recovery took place slowly in the region, mainly due to uncertainties regarding international trade blocs and internal policies for industrial recovery. 

While Latin America continues to grapple with the fallout from the Covid-19 pandemic, the war in Ukraine has intensified supply chain problems and boosted fuel and food prices (rising commodity prices worsen the inflationary pressures post-pandemic). The cost of gasoline rose steadily throughout 2021, impacting public transportation, government budgets and agriculture. The price of crude oil jumped even higher in late February 2022 in response to the Russian invasion and the resulting Western sanctions. Higher energy prices constrain government budgets, as politicians attempt to keep costs down by limiting price hikes (e.g., Jair Bolsonaro in Brazil), by cutting taxes (e.g., Nayib Bukele in El Salvador), or increasing subsidies (e.g., AMLO in Mexico or Alberto Fernández in Argentina, among others). These policies present drawbacks, including diverting budgets from other social spending. 

All in all, the energy price increases have different impacts in the countries of the region depending on their energy trade balance position (positive effect on net exporters) and their refining capacity (positive effect on countries with updated refining infrastructure and favorable domestic prices). 

*Impact of US policies* 

If we take into account the increase in the value of the US dollar against the strongest currencies in the world, it is one of the most significant economic events of 2022. The appreciation of the US currency is due, in large part, to the sharp increase in the interest rate adopted by the Federal Reserve of the United States, with the objective of containing inflation. A higher interest rate in the US has helped lure investors into the dollar thanks to increased profitability. Emerging economies, such as Latin American countries, tend to be particularly affected by this process, due to the devaluation of their currencies. 

Thus, the depreciation of Latin American currencies has become particularly noticeable since May 2022 (when the US Federal Reserve implemented a more contractionary monetary policy). The accumulated devaluation in some cases managed to reverse the appreciation of currencies during the first four months of the year. Although the price of commodities continues to be affected by the war, the appreciation of the dollar is causing a drop in the price of raw materials (the higher yield on US bonds attracts investors, to the detriment of commodities).

*Regional steel sector* 

As mentioned above, the Latin American steel industry presents a scenario of moderate decline in demand. Apparent consumption in the region, which in 2021 was 74.9 million mt (+25.8 percent), after the first eight months of 2022 points to an expected decrease of 9.5 percent to 67.8 million mt in 2022. For North American consumption, a brief recovery of 1.2 percent is expected, while the European Union plus the United Kingdom should collectively experience a fall of around 3.5 percent in apparent demand for this year. 

Therefore, our region should end 2022 with 105 kg/per capita, equal to the average for the 2018-2019 period. Despite the more intense decline in Latin America, it is observed that the region proved to be more resilient, consuming the same 46 percent of the global average obtained in that period per person. In turn, the world is expected to decrease by only 3.7 percent in 2022 (226 kg/per capita), below the average of the last two pre-pandemic years (228 kg/per capita). 

Crude steel production could also fall by 2.8 percent compared to 2021 if the 62.8 million mt expected for the end of 2022 are confirmed. This year started with good expectations for a recovery, but Russia's declaration of war against Ukraine brought political, commercial, and structural uncertainties that slowed down this recovery and braked the impetus of supply chains. 

The production of laminates, which ended 2021 at 55.9 million mt, indicated an estimated decrease of 1.1 percent in 2022 to 55.3 million mt. After the previous year of strong recovery, in 2022 Latin America demonstrated that it is possible to maintain production levels at high levels, with support from domestic markets and less dependence on extra-regional imports as the driving force, considering that a moderate contraction scenario is natural after a 2021 of market recomposition.

Thus, it is observed that the war intensified the structural crises of emerging and developing economies and brought to light the need to reassess our energy matrices, the productive routes of steel and its carbon footprint worldwide. 

*Chinese steel market*

China's economy has met IMF expectations and GDP growth of 3.2 percent is expected for 2022. However, Chinese crude steel production and consumption decreased by 3.0 percent and 5.4 percent, respectively, in 2021, totaling 1,033 million mt and 992 million mt. After the pressure to reduce installed capacity in China since 2016, it came to 1,156 million mt in 2021, 0.1 percent less than the previous year, according to the OECD data from the September meeting of its Steel Committee. 

The fall of the Chinese market was extremely important for other markets around the world, especially emerging countries, which saw an increase in China's share of global excess capacity from 16 percent in 2020 to 26 percent in 2021, as China's share of world crude steel production, which was 57 percent in 2020, amounted to 53 percent in 2021. 

For China's consumption, after contracting by 5.4 percent in 2021, while other world economies grew, it is expected that a further decline of 4.0 percent for 2022 will become official, due to the recovery of global markets and international pressure to reduce excess production capacity. 

What do you expect for 2023? 

The expectation of a real regional recovery for mid-2022 should only occur from this year (+1.7 percent). Political uncertainties also appear as possible obstacles, which could interfere with the implementation of the structural reforms that the region needs. 

The main uncertainties began with the war between Russia and Ukraine, which partially modified the trade blocs that interact with Latin America and had a negative impact on foreign investment and domestic consumption, as well as contributing to the intensification of the structural and health crisis in the region.
Therefore, the biggest challenges ahead in 2023 for Latin American markets are rising inflationary pressures, additional monetary tightening and political uncertainties. As for external markets, the level of attention is increased regarding expectations of lower global growth and less favorable global financial conditions. Thus, a slow normalization in post-pandemic supply chain frictions would boost the growth of production in the steel-consuming sectors. 

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