Although much uncertainty remains about the world economy in 2023, Project Blue forecasts stronger steel demand, and implicitly higher steel production, primarily driven by China.

Global steel production was 1,914Mt in 2022, a 4.3% year-on-year decline. The drop is not surprising as steel demand was impacted by the deterioration of the world economy, the conflict in Ukraine and China’s ‘zero-COVID’ policy.  The drop was largely across the board in terms of major producers with the exception of India (+5.5% y-o-y) which has a large domestic economy relatively insulated from the rest of the world.  The Middle East (+7.1%) also posted strong gains.  

The largest declines took place in the CIS region (-20.2% y-o-y) and in the EU (-10.5% y-o-y), the former being directly impacted by the Ukrainian conflict, the latter affected by a slowing economy and an energy crunch. Among the large EU economies, Spain posted the largest decline in steel output (-19.2%), followed by France (-13.1%), Italy (-11.6%) and Germany (-8.4%). With a monthly production of 9.2Mt, December 2022 marked the lowest output of the past two years. The global deterioration of the economy is also illustrated by lower steel production in the USA (-5.9%), Japan (-7.4%) and Korea (-6.5%).

China’s steel production declined by 2.1% year-on-year to 1,013Mt, with demand impacted by the country’s ‘zero-COVID’ policy and a depressed property market. Blast furnace (BFs) operating rates have been hovering around the 80-82% level, de-incentivised by low demand, low prices and low margins. However, China’s pig iron production dropped by only 0.8% y-o-y indicating that BFs have increased their market share at the expense of electric arc furnaces (EAFs), most likely because BFs output benefited from previous capacity swaps.

The outlook for the steel industry should improve in 2023, driven by China. The abrupt reversal of China’s ‘zero-COVID’ policy and the expected relaxation of financing for property developers should benefit domestic demand but also contribute to a stabilisation and a recovery of the property market later in the year. These factors will be positive for steel consumption and production. BFs’ operating rates have been increasing to 84% in January, although the trend would need to be confirmed after the Chinese New Year Holidays. Project Blue forecasts steel output at 1,025Mt in 2023 compared to 1,013 in 2022, with upside. With newer BFs coming on stream in 2023, still a result of capacity swaps, pig iron ore production could post a higher year-on-year growth.

In the rest of the world, steel demand and production will largely depend on macroeconomics. Uncertainty remains on whether the US economy will enter a recession or if the Fed will be able to manage a soft landing. Project Blue believes that any economic downturn in the USA, should it occur, would be mild.  On the other hand, Europe is unlikely to avoid a recession with Germany’s Q4 GDP posting a 0.2% q-o-q decline. However, steel production is forecast to increase both in the US and the EU in 2023 but only gradually and depending on economic developments.

The weakness of the steel industry has impacted iron ore prices which declined during most of 2022, dropping 50% from its March high of US$160/t to a nadir of US$81/t in early November. The changes in China’s COVID policy triggered a price recovery with iron ore prices closing the year at US$117/t. In January, iron ore price jumped to nearly US$130/t with markets anticipating a stronger demand after the Chinese New Year, in line with a steel production recovery. Port inventories increased in January to 137Mt while iron ore inventories held at mills dropped, indicating that the mill restocking may be, for now at least, completed. As above discussed, demand for iron ore should be supported by a rebound in steel production. Seaborne supply will only increase moderately in 2023, with production guidance provided by the large mining companies indicating limited growth. Q1 shipments are also traditionally constrained by seasonality both in Brazil and Western Australia. As a result, iron ore prices should be well supported, and Project Blue forecasts an average price of US$125/t for 2023.