WSD Strategic Insights CXXXIII: 14-Country economic condition far from a near-term positive for global steel demand

14-Country data:  Global steel demand may be facing an uphill battle

In order to perceive better the forces impacting the global economy that are most relevant to the steel industry, WSD has created the accompanying exhibit titled “Key Economic Factors for 14 Countries.”  These 14 countries account for about 85% of global steel production, 84% of global GDP, 95% of global automotive output and about 82% of global fixed asset investment. 

Key perspectives:

Steel is a “late-in-cycle” industry tied significantly in most countries to fixed asset investment (FAI) spending.  (Note:  On a GDP reporting basis, FAI is equivalent to Gross Fixed Capital Formation.)  FAI accounts for 20-33% of GDP in many countries – with the figure for China at about 43%.  However, FAI accounts for 75-85% of many countries’ steel demand – with the figure for China at about 92%.  Key observation:  FAI will not be rising as a share of GDP in the next few years if more economies, as expected, become even more household spending intensive. 

The current coronavirus crisis is a demand crisis, while the global financial crisis that came into effect in the second half of 2008 was a monetary crisis.  The 2008 crisis was overcome by shoring up the banks’ balance sheets, which resulted in long-term global economic benefits.  In the current case, many countries are incurring huge fiscal deficits in order to “bootstrap” their economy.  However, this corrective action is a long-term economic negative.  If interest rates rise in the years ahead, for whatever the reason, rising governmental interest payment obligations will “crowd out” expenditures on other items including infrastructure spending.   

• GDP change.  Based on the World Bank estimates as of April 2020, after a global GDP 3% decline in 2020, there will be a recovery of 5.8% in 2021.  If so, global GDP in 2021 would be only 2.6% higher than in 2019.  Key perspective:  When global GDP is expanding only slowly, services account for a growing share of the global output, which diminishes steel intensity – i.e., steel consumption per point of GDP.  
• Services (a supply-side GDP figure) as a share of GDP.  In the USA in 2018, services amounted to 79.8% of GDP, with the next highest figure at 71.4% for Japan.  The lowest figure was Saudi Arabia at 37.9%, followed by China at 38.7%.  The European Union figure was 71.4%.  Key perspective:  When services are a high share of GDP, fixed asset investment is, by definition, far less important, explaining why steel demand growth tends to be slow in the Advanced World.
• Gross Fixed Capital Formation (a demand-side GDP figure) as a share of GDP.  The high figure in 2018 was China at 41.6%, followed by Indonesia at 32.2% and South Korea at 31.1%.  Interestingly, Vietnam is about 26.5%.   Key perspective:  China’s proportion is so high that, as a result, there’s been a huge rise in its municipalities’ debt in order to support this spending.     
• Share of global automotive output.  The 2019 figure for the first five Advanced Countries was about 45% of the global total.  Key perspective:   Automotive output in 2021 may be 5-7% less than in 2019 because of less optimistic household sentiment.     
• Interest rates on 10-year government bonds.  The figures for Japan and the European Union are close to zero.  The high figure at present is Indonesia at 8.0%, followed by Mexico at 7.3%.  The USA 10-year T-bill rate is 0.8%.  Key perspective:  The interest rate on the lower-yielding governmental bonds in the next year may be pulled up by the recent rise in yields on non-investment-grade bonds. 
• Gross government debt as a share of GDP.  The high figures, prior to the increases resulting from the coronavirus threat, were Japan at 238%, the USA at 106% and Canada at 88%.  The figures are lower in the Developing Countries, including 54% in China, probably because of less international appetite for their debt – i.e., it was too expensive to issue.  Key perspective:  Governmental debt in 2021 in many countries will probably rise further due to fiscal deficits reflected in tax (revenue) shortfalls.
• Consumer prices.  At the current time, the high year-to-year gain is India at 6.6% and Russia at 6.6% (due in large part to the devaluation of the ruble versus the U.S. dollar).  The figure for China was 5.2%, and that for the USA was 2.3%.  Key perspective:  When the rise in consumer price indices is less than 2%, many economists view this as a negative because it’s a sign of sub-par economic growth.

• Stock market performance since December 21, 2019.  The largest declines are Russia at 29% and Brazil at 34%.  The USA figure is 18%, while that for China is only 7.5%.    

• CO2 emissions.  For the 14 countries, the figure in 2017 was about 29 billion tonnes, which compares to total global emissions of about 37 billion tonnes.  China accounts for a whopping 29% of the global total, with the USA at 14%.  At an average emission rate of 1.47 tonnes of CO2 per tonne of steel produced (perhaps not fully including indirect emissions), the global steel industry emits about 2.6 billion tonnes of CO2 per annum – or about 7% of the global total (and about 25% of the total by all industry).    Key perspective:  Steel companies in an increasing number of countries are committing to zero carbon emissions by 2050.  If the industry-wide capital requirement to accomplish this goal were to be $350 billion, the capital outlay per year over 30 years would be about $6.50 per tonne. 

The rise in the operating cost to produce hot-rolled band could be $50-100 per tonne when taking into account the expense to generate the needed hydrogen and convert the captured CO2 into products such as methane, ethylene, caustic soda and those long-chain polymers (materials made from long, repeating chains of molecules including rubber, polyester, epoxies and glass).  

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