It’s the demand, stupid!
To paraphrase a campaign slogan of former US President Bill Clinton, it cannot be repeated often enough and this year it has been brutally confirmed: Without competitive steel consumers with a decent level of production, domestic steel production is left out in the cold. While inventory-driven special factors led to supply bottlenecks and record profits for steel producers in 2021 and 2022, demand for steel this year was largely determined by real demand. This has shrunk in all key customer sectors, with the medium-term trend of recent years clearly pointing downwards on the EU market and even more markedly in Germany. Inventory effects hardly played a role and steel exports were only able to compensate for the weak domestic market to a limited extent. Steel manufacturers’ earnings have come under considerable pressure.
Capacity adjustments, such as those announced by ThyssenKruppSteel, are a consequence of the downward trend in demand from local processors. Customers, not politicians, determine how much steel is needed in Germany. The current and future problems of steel processors have already been described in this blog post. Clever steel policy should also keep an eye on strengthening the demand side in terms of classic location conditions. After all, the issue of location has long since reached medium-sized steel processing companies. In reality, politicians are unfortunately focusing too much on supporting steel manufacturers and ignoring the negative consequences for their customers. Particularly against the backdrop of rapidly rising CO2 costs from 2026 onwards, this clouds the prospects for the entire steel value chain.
Costs determine prices
In times of weak demand, production costs are the most important price-determining factor for steel. Accordingly, spot market prices for flat products from the blast furnace route have fallen significantly over the course of the year, while there have been no major changes for long products from the electric arc furnace. For the foreseeable future, both production routes will not be able to implement any major price increases without the support of significantly higher production costs. Manufacturing costs are in turn driven by raw material costs, which in the case of the blast furnace route are made on the global market, primarily in China. A further decline is quite possible here in the coming year, although price increases are still possible in the winter months. Scrap and electricity are the key factors for the electric steel plants.
Steel buyers should therefore continue to closely monitor the raw material prices of the respective routes in the new year as the most important early indicator for steel prices.
De-carbonization with hydrogen meets reality
Politicians and all blast furnace-based steel manufacturers in Germany have opted for hydrogen-based direct reduction as the ideal way to achieve decarbonization. However, the implementation of the plans is clearly faltering. The reason: it is still not clear when, in what quantities and at what cost green hydrogen will be available. Neither investment decisions for the necessary domestic electrolysers nor the hydrogen import strategy of politicians are progressing at the necessary pace. In the relevant company presentations and press releases, it is rather indicated in the small print that the new direct reduction plants will initially be operated predominantly with natural gas and then, depending on availability and costs, be converted to green hydrogen.
The planned commissioning of the new direct reduction plants also appears to have been delayed if one compares the original announcements with the current announcements. Saarhütten is now talking about commissioning in 2028/2029 instead of 2027, at Salzgitter AG the first plant “could” go into operation in 2026 instead of 2025, at ThyssenKruppSteel the completion date originally set for 2025 now does not even appear to be certain for 2026, ArcelorMittal has recently put investment decisions for the German (and other) sites on hold.
If you look beyond the national horizon at international studies or statements from leading plant manufacturers, it quickly becomes clear that the starting conditions for the internationally competitive production of hydrogen-based green steel are not good in Germany. The intention of politicians to nevertheless save all existing blast furnace sites with massive public funding and far-reaching market interventions in the new green age appears increasingly questionable. Equally worthy of discussion is the question of whether the steel industry’s uniquely ambitious global climate targets can be achieved and, if so, at what cost. For steel processors, this means that they should critically scrutinize their own targets and commitments to customers to reduce CO2 emissions. This applies to both the time axis and the respective reduction stages.
Political influence is becoming ever stronger
Steel summits, demonstrations, political declarations and initial calls for state participation in steel manufacturers show that steel is now largely a political issue. From a historical perspective, the phase in which steel production became a “normal” industry under market economy conditions with the expiry of the ECSC Treaty in 2002 has come to an end. Hardly any major investment is made in the EU without state aid, and no major corporate decision is made without political comment. The factual circumstances of the EU’s green transformation on its own internationally and the high symbolic power of the steel locations are leading to a spiral of state intervention that is apparently not yet over.
Measures to further seal off the market from imports are likely to increase. It is also likely that usage quotas for CO2-reduced steels will be introduced under the slogan of green lead markets, which in the worst case can only be met with green EU labels. Direct state intervention in individual companies has never been as high as it is now. There is also a clear trend towards more and more protectionism at international level. The new president of the USA is likely to further intensify this. Many Asian countries, which have previously been rather cautious in this respect, are now also sealing off their steel markets more tightly. There are signs of a regionalization of the steel trade. Each steel processing company must assess for itself what these trends mean for its own international competitiveness and future prospects. However, it would be negligent to turn a blind eye to the challenges ahead.
Andreas Schneider
stahlmarktconsult.de
English
German
