Doom and gloom characterises the European Steel Association's 2019-2020 Economic and Steel Market Outlook following a decidedly downbeat presentation earlier today by EUROFER's Jeroen Vermeij, the organisation's director of market analysis and economic studies, who retires from the role early next year.
Mr Vermeij spoke of a continued downturn in sentiment, dipping EU industrial confidence and depressed EU service sector confidence and claimed that continued weak GDP growth can be expected in the region of 1.2% with the EU economy remaining dependent upon consumer spending.
According to Vermeij, the downturn was deepening and there has been a steep decline since 2018. He said that the conditions of the EU steel industry were deteriorating quickly amid uncertainty created by Brexit and trade tensions between the USA and China. Furthermore, no major changes in the situation are expected for the rest of the year and the current state of affairs is being described as the European steel industry's worst performance since the Eurozone crisis. Rising stocks, said Vermeij, indicated that all was not well in the supply chain.
Since the second quarter of 2019, the challenges that the EU sector has to face have become more severe, with even more negative repercussions on market conditions. After recording falls over the first two quarters of 2019, early indications for the third and final quarter of this year signal a further year-on-year reduction in real steel consumption, resulting in a total decrease in real steel consumption by 0.5% over the year 2019. For 2020 a low-level stabilisation is anticipated. The expected reduction of apparent steel consumption in 2019 of 3.1% year-on-year and persisting import pressure is, in essence, expected to predominantly penalise EU steel producers in their financial performance.
Market conditions are expected to improve slightly from the second quarter 2020, although risks related to import distortions and continued global overcapacity are likely to continue undermining the stability of the EU steel market. Apparent consumption is expected to recover in 2020 with a growth rate of 1.4%, basically as a result of a modest re-stocking.
Business conditions in the manufacturing industry have been deteriorating since the peak of the previous cycle, around the end of 2017. However, there was an acceleration in this downward trend in the second quarter of 2019, particularly in the automotive industry, while the construction sector, which accounts for 35% of steel consumption, continuing to record output growth. This, claims EUROFER, has resulted in a pronounced slowdown in output growth in steel-using sectors. Total output in steel-using sectors fell by 0.2% year-on-year in the second quarter of 2019, having registered positive growth in the first quarter.
The downturn in industrial activity does not only affect Europe, but has reached a global scale, reflecting growing trade tensions and uncertainty – which increasingly hamper business investment. A substantial rebound is not in sight, but some recovery in EU steel-using sectors is expected over the course of 2020.
External risks will continue to cast a shadow over the coming quarters.
EUROFER says that global trade fundamentals have clearly changed for the worse, due to the US government’s new tariffs on goods imported from its main trading partners, triggering a retaliation with similar tariffs on US products. As a consequence, the EU’s manufacturing sector is experiencing a serious downturn, given its large exposure to global trade. A no-deal Brexit and a further escalation in protectionist trade measures would make the outlook even more negative. On the other hand, an orderly Brexit and easing trade disputes between the US and its main trading partners would help restore business confidence and support activity in steel-using industries.
Output in the EU’s steel-using sectors is forecast to grow by 0.4% in 2019 and by 0.6% in 2020.
The outlook for the global economy has further deteriorated over the second quarter of 2019 and downside risks have become stronger, coupled with the intensified slowdown in international trade that has considerably affected industrial activity and led to disruptions in downstream supply chains. The EU economy appears to be particularly vulnerable as it is largely exposed to fluctuations in international trade; most of its contribution to growth during the previous cycle came from exports. On the other hand, economic growth, albeit slowing, continued to be supported by final consumption – which has partly offset declining contribution from exports. Services, contrary to the weakness of the industrial sectors, have proven more resilient, also due to the fact that they are far less exposed to both internal and external competition.
The EU economy continues to be subject to downside risks, such as a possible escalation of the trade dispute between the US and its main trading partners, followed by a no-deal Brexit, through a further deterioration in business sentiment and lower investment growth. GDP growth has been slowing down both at the world level and in the Eurozone since the peak in the international economic cycle in the second half of 2017. This slowdown has gained speed during 2019, particularly in Germany – the eurozone’s largest economy – as a result of the continued slump in manufacturing in general and the automotive industry in particular. As a result, the EU recorded its lowest year-on-year growth rate since the second half of 2013 in the second quarter of this year. The macroeconomic outlook is not likely to improve significantly, reflecting continued uncertainty and weakness in most industrial sectors, although the EU economy is not expected to slide into a recession thanks to expansionary monetary and – to a lesser extent – fiscal policies.
EUROFER’s third quarter 2019 forecast for EU GDP growth is 1.2% both in 2019 and in 2020.