OECD: Grave concerns about the deterioration of steel market conditions
by David Fleschen
Important challenges need to be overcome to ensure the sustainable recovery of the global steel industry. At its 89th session held virtually on 18-19 and 22-23 March 2021, the OECD Steel Committee held in-depth discussions on the global steel market situation and outlook, challenges facing the global steel industry including market-distorting government interventions and growing excess capacity, and policy approaches to ensure a level playing field in the sector. Members agreed to accelerate their work towards building a comprehensive database of subsidies and other government support measures provided to steel producers in major steel-producing jurisdictions, in view of the challenges that such measures pose to the health of the global steel industry. Other topics discussed included the impact of COVID-19 on global and regional steel markets, steel trade policy developments, and steelmaking capacity trends. The Committee also advanced its work on state-owned enterprises and their role in world steel markets and its work on trade circumvention of steel products.
Global growth prospects and the steel market outlook remain uncertain
The COVID-19 pandemic has had a negative impact on the global economy in general, and on the steel market in particular. In its March 2021 Economic Outlook, the OECD forecasts world GDP to rebound by 5.5% in 2021 and 4% in 2022. The effects of the pandemic have been significant for the steel industry, with major steel-producing economies experiencing significant contractions in steel production in 2020. While steel prices declined in 2020, they have recently increased as steelmaking capacity idled during the heights of the pandemic could not be brought online quickly enough to meet recovering steel demand and restocking activity. While steel prices have turned around recently, the sharp increase in raw material prices observed over the past year has worked to weaken average profit margins in the steel industry.
Global steel demand is expected to recover only partially in the near term, with the level of finished steel demand in 2021 expected to remain below pre-pandemic levels in most jurisdictions. Besides risks related to the pandemic, the main risks to the steel market outlook include the impacts of growing global excess capacity, supported by harmful government subsidies and investment policies that are putting the long-run viability of producers at risk and should therefore be addressed urgently. In this context, the Steel Committee recognized that the work of Global Forum on Steel Excess Capacity (GFSEC) has become more important than ever.
Global steelmaking capacity trends are a cause for concern
The latest available data from the OECD show that global steelmaking capacity increased to 2,453.2 million metric tonnes (mmt) in 2020. In addition, the gap between global steelmaking capacity and crude steel production increased to 625.4 mmt in 2020. The Committee noted deep concerns that a number of planned capacity increases are premised on expectations of strong increases in future demand, with many investments being supported by governments and not driven by market considerations. Several of these investments are cross-border in nature. This creates a significant risk of exacerbating the excess capacity situation, and raises the likelihood of supply further overshooting the true needs of the market. The Committee underscored the need to engage with all relevant stakeholders to foster better understanding of these developments and address their risks.
Trade policy developments and duty circumvention
The Committee noted that the COVID-19 pandemic has accelerated the decline in global trade of steel, with the downturn in global steel exports being more pronounced in the second and third quarters of 2020. The Committee also held constructive discussions to better understand the reasons for and effects of recently implemented trade policy measures applied to steel and steelmaking raw materials, while recognising the role of legitimate trade defence instruments. Members also discussed new work including in the area of duty circumvention in the steel sector, in a context where such behaviour is rising, as suggested by the increase of anti-circumvention investigations around the globe. The Committee reiterated its support to enhance efforts to ensure that trade in steel remains as unrestricted and free of distortion as possible, and reducing trade barriers on steel products and related materials, on both the import and export side.
State-owned enterprises, subsidies and market distortions in global steel markets
State-owned enterprises (SOEs) account for a significant portion of global crude steelmaking capacity. While concentrated in certain geographies, SOEs have global reach through their engagement in international trade and investment. With the activities of SOEs in domestic and international steel markets potentially creating market distortions, members of the Committee agreed to advance their work in this area with two key objectives: first, to better understand the market context of cross-border investments by SOEs and the financial conditions of the relevant firms and, second, to shed light on the financing of SOEs and support measures provided to them.
The Committee also discussed the state of its work on building a database of subsidies in the steel sector, with members reaching consensus on moving forward to the next phase of the project. Members agreed to resume collecting subsidy data on the world’s largest steel producing jurisdictions, including jurisdictions where recent data on increasing production has raised concerns about potential government support. This work represents a major step towards improving transparency on support measures for steel producers and will feed into future analytical work examining the impacts of these measures on global steel markets.
Source and Photo: OECD