After a phase of weak demand, the global steel industry has recovered since 2016: both steel prices and the utilization rate have returned to growth, with a positive effect on profit margins, previously low for many companies in the sector. There World Steel Association (WSA) expects global steel usage to grow 2,6% in 2017 and 1,6% in 2018, driven largely by the improving economic environment in most developed and developing markets. However, while the current recovery in the steel market is mainly driven by a few cyclical factors, some underlying structural problems remain.
Steel continues to be exposed to political and economic risk factors such as, at present, the threat of rising protectionism, the Chinese slowdown, Brexit and capital outflows from emerging markets. If any of these risks materialise, the immediate effect could be a renewed decline in domestic or global steel demand. At the same time, steel producers and traders continue to face a number of difficulties: overcapacity remains a major problem, as well as the current global utilization rate is around 72% which is it therefore remains low compared to the 85% share prior to the 2008 crisis.
While the current recovery has temporarily eased some of the pressures caused by steel overcapacity, it seems clear that any slowdown in demand would highlight how much price swings affect the profitability of firms with high fixed costs of production, high on capital and operating expenses and, therefore, a high credit risk. And the instability of market conditions in the steel industry is not favored by future environmental and technological challenges: the European steel industry will indeed have to deal with the stricter environmental standards imposed by the EU, while technological innovations could cause a decline in demand from the main reference sectors in the future.
According to analysts, the growing trend towards e-mobility is one of these challenges and it cannot be excluded that, in the medium term, the steel sector will be impacted by the drop in demand from the automotive industry, a key buyer of the industry, due to the shift towards electric motors and lighter body cars.
As reported by Atradius, German steel production it decreased by 1,4% in 2016 (42,1 million tons) mainly due to the drop in prices in the first half of the year, the pressure on imports and excess production capacity. The financial statements of many steel companies have recorded losses related to declining sales, low margins and devaluation of stocks. However, prices recovered starting from the second half of 2016 and this favored the improvement of margins and results. Furthermore, steel production returned to growth between January and August 2017 (+2,1% compared to the previous year), so much so that German demand for steel should record moderate growth in the two-year period 2017-18 (+0,9 respectively .0,4% and +XNUMX%).
The balance sheet and liquidity situation of German steel companies is better than the average and, during 2016, bankruptcy cases regarding German steel companies decreased, not having to show significant changes in 2017-18. At the moment, the German steel sector shows good resilience and can count on the competitive advantage offered by high-tech products, as well as solid demand from the automotive, construction and machinery sectors. However, the market environment is becoming increasingly difficult and the pressure on steel companies has increased over the past two years.
In addition to the issues related to punitive tariffs and trade barriers, there are some structural challenges, including fluctuations in sales and raw material prices and excess production capacity, while the number of foreign competitors from Africa, Asia and South America continues to grow, favoring pressure on prices and profit margins. Not forgetting the EU's emissions trading scheme and high energy costs in Germany which threaten to increase the financial burdens of German steel companies.
In the medium to long term, the decline in demand for steel and metals from the automotive industry, due to the shift towards electric motors and cars with lighter bodywork, could have a major impact on German steel companies. For these reasons, it cannot be excluded that the sector will face further challenges in the medium term, with declining sales and margins for many companies along the value chain, and an increase in insolvencies and bankruptcies.
Also for the Italian economy the metal sector, and in particular the steel industry, is of primary importance and contributes about 2% of the GDP. The steel industry was affected by the sharp decline in production and consumption recorded in 2009 and between 2011 and 2013, due to weak demand, excess production capacity and falling prices, with consequences on margins profit of all firms along the value chain. Given persistently weak demand and cheap imports from China, Italian steel production fell by more than 7% in 2015 (22 million tons).
However, in 2016 the sector recorded a recovery thanks above all to the increase in demand from the automotive sector, as well as to the import duties imposed on steel from China: steel production then grew by 6%, sustained by the increase in the production of flat products, while products recorded only a modest increase. According to Atradius, steel production grew by a further 1,7% between January and August 2017: sales prices started to rise again and exports benefited from the favorable exchange rate of the Euro.
However, a real recovery in domestic steel sales is not expected until 2018, considering that demand from the construction industry, which accounts for about 50% of steel consumption, has so far shown only a modest recovery. Exports could suffer the impact linked to the Algerian market, together with Germany one of the main destinations of the Italian steel industry, which should become self-sufficient by the end of 2018. In this context, the recovery in the sales prices of steel and metals, together to exports and the improvement in domestic demand, contributed to improving the profit margins of companies during 2017.
Payment delays and insolvencies fell in 2016 and are expected to remain stable or decline further this year as well. However, businesses operating on the domestic market continue to be confronted with the slowness of payments from their customers. Analysts are particularly cautious of steel distributors and service centers, which have a large number of relatively small, low-value-added companies with limited profit margins and heavily indebtedness. Here then is that if, on the one hand, the increase in prices favors steel mills, on the other it could create problems for distributors in terms of greater working capital requirements.
