Ongoing war of aggression by Russia against Ukraine risks further downturn in global steel markets and capacity challenges
Statement by Ms. Sheryl Groeneweg and Mr. Lieven Top, Vice-Chairs of the OECD Steel Committee
93rd session of the Steel Committee, 13-14 March 2023
At its 93rd session held on 13-14 March 2023, the OECD Steel Committee expressed its deep concern about Russia's aggression against Ukraine and its impact on global steel markets, contributing to a continued stagnation in world steel trade, disruptions in raw material markets, and increased market uncertainty. Delegates agreed that the Committee stands ready to support Ukraine - a long-standing member of the Committee - in the reconstruction and decarbonisation of its steel industry. The consequences of the war are reverberating internationally through the steel supply chain, and have led to an increasing number of export restrictions on steelmaking raw materials such as scrap. These developments are compounding the already poor steel market conditions being caused by a plethora of concurrent factors including increased cost pressures on steel producers and ever-growing excess steelmaking capacity. Responding to these challenges, the Committee launched a Global Steel Supply Chain Observatory, aimed at assisting members and industries with real-time monitoring of raw material markets and related policy measures, providing a platform for finding solutions and reducing risks and vulnerabilities. The Committee also discussed its role and ambitious work programme on steel decarbonisation, and how its mandate of ensuring a level playing field and open markets can support this fundamental industry transformation that is occurring via different instruments and at various speeds worldwide.
Participants at the meeting:
- Discussed the very difficult year for the steel industry in 2022, driven by the world economic slowdown, persistent high inflation, supply chain disruptions, and the downturn in China;
- Expressed concerns about the further increase in global steel excess capacity. Global crude steelmaking capacity rose to 2 463.4 mmt in 2022, with significant capacity expansions particularly in Southeast Asia and the Middle East contributing to the growing gap between global crude steelmaking capacity and production that reached 632.0 mmt in 2022 from 516.9 mmt in 2021. The modest longer-term outlook for steel demand growth risks exacerbating these challenges;
- Highlighted continued concerns regarding Chinese steelmaking capacity, accounting for 47% of the world's total in 2022, particularly given the current market slowdown from an ailing real estate sector and possible steel demand declines in the coming years;
- Reviewed recent trade measures on steel and steelmaking raw materials, including sanctions, and agreed that addressing the root causes of excess capacity remains a priority to avoid trade tensions involving steel products in the future;
- Agreed to strengthen their work on the impacts of market-distorting subsidies and other government support on excess capacity, trade and the viability of the steel industry, while encouraging decarbonisation of the steel sector under conditions of fair competition;
- Discussed some of the pathways to the decarbonisation of the steel sector under conditions of fair competition across regions using different technologies, and the role of the Steel Committee on this important issue, including the monitoring of different emission measurement approaches; and,
- Launched the OECD Global Steel Supply Chain Observatory, where the Committee will assist members and industry organisations in addressing vulnerabilities and risks in raw material supply.
The economic slowdown and high inflation are weighing on the steel market outlook
Following a very difficult year for the steel industry in 2022, marked by strong contractions in global steel demand (-2.3%), production (-4.4%), trade (-11.1%) and prices[1] (-54%), the outlook for 2023 remains weak. The deterioration in international steel market conditions is being driven by the global economic slowdown, historically high inflation worldwide, the impacts of Russia's aggression against Ukraine, and an ailing Chinese real estate market that has depressed steel demand in the world's largest steel-consuming economy. Following last year's slump, growth in global steel demand is expected to be limited to only 1% in 2023. Rising interest rates and the tightening of monetary policy, sustained high inflation, weak consumer spending and elevated energy prices are likely to keep steel demand subdued going forward. The Committee reviewed recent long-term steel demand forecasts, noting with concern the growing disconnect between the rapid build-up of new steelmaking capacity in some economies and market expectations of steel demand. Government and industry stakeholders alike emphasised the need to ensure that capacity investments are driven by market considerations to not further exacerbate deteriorating market conditions being caused by excess capacity.
Risk of further increases in excess capacity
The increase in global excess capacity is raising risks of future oversupply, steel trade disturbances and trade frictions involving steel products. The work of the OECD Steel Committee shows that global steelmaking capacity increased to 2 463.4 mmt in 2022 despite the market slowdown, and the gap between capacity and production surged to 632 mmt. As a result, the average capacity utilisation rate has fallen to 74.3%, a level that is not in line with a healthy and financially viable steel industry that needs to invest in a low-carbon future and remain competitive vis-à-vis alternative materials. Looking ahead, OECD analysis shows a potential of 166.1 mmt of new steelmaking capacity coming on stream in 2023-25, more than half of which is carbon intensive as it involves investments into traditional blast furnace/basic oxygen furnace plants. The Committee agreed to monitor steel demand and capacity developments more closely, with a view to mitigating potential future surges of steel exports from excess capacity countries that would destabilise markets, hurt the profitability of steel companies in all producing economies, and trigger trade frictions.
Enabling the steel industry to reach its full potential
The Steel Committee agreed to continue addressing structural problems facing the steel industry, such as market-distorting government interventions that are not only the source of trade frictions but also inefficiencies that inhibit investment activity needed by the steel industry to remain competitive. The review of trade policy actions by the Committee points to an uptick recently in the number of trade remedy measures on steel, indicating the need to address the sources of unfair trade in steel. The Committee agreed to begin analysis of the impacts of government interventions on the health of the steel industry, including their market-distorting effects, as a basis for developing guidelines on government support during the course of 2024. This work will also examine the role of support measures to promote decarbonisation of the steel industry while maintaining a level playing field and fair competition. Delegates emphasised the importance of the Committee's role in analysing policy responses to steel decarbonisation and facilitating discussions between governments and steel industry stakeholders, which in the near term will include deep analysis and discussion of the industry's transformation process and differentiated decarbonisation pathways, and issues related to scrap and hydrogen availability. As this transformation is complex and multi-faceted affecting issues such as technology development, capacity, competitiveness and trade, it requires clear common objectives and a comprehensive approach that recognises differences in the characteristics of the global steel industry. The Steel Committee looks forward to acting as a platform to help address these issues to secure a competitive and sustainable development of the global steel industry in the coming years.
