Global steel production volumes should remain strong in 2022, while steelmakers will continue to benefit from above-trend, albeit reducing, margins, Fitch Ratings says. A neutral sector outlook also reflects Fitch’s view that high capacity utilization outside of China will support strong cash flow generation, while Chinese steel output is finally declining.
Ex-China steel output has exceeded pre-pandemic levels in 2021, and additional growth of nearly 5% is expected in 2022, according to the World Steel Association. Rising consumption reflects pent-up demand and stimulus measures, including the EUR750 billion EU recovery fund and the recent USD550 billion US infrastructure bill, across durable goods, autos, construction and infrastructure, with strong support for the energy transition.
We expect a low single-digit decline in steel production in China in 2022, with total output of around 1 billion tonnes, anticipating that lower demand from the slowing property sector will mostly be offset by higher infrastructure spending and manufacturing.
The global recovery has lagged that of China due to the timing of Covid-19 outbreaks as well as the speed and size of support to China’s economy compared to other countries. Therefore, we expect GDP growth in China to slow to a more normal rate of 4.8% in 2022, while other countries are still seeing above-trend growth. This translates into significant differences in steel prices with significantly higher prices in the US and Europe. US and European producers will continue to benefit from materially above-trend margins in 2022, while China has mostly corrected already.
Exceptional earnings and cash flow generated in 2021 allowed many steelmakers to pay down debt, proceed with consolidation or improve business profiles through strategic growth investments, improving their positions for future cyclical downturns.
