Excess Global Capacity Will Outlast High Prices: OECD

A measure of just how strong demand has been: The OECD forecasts that world GDP will rebound by 5% in 2021 and 4% in 2022.

Zumkley’s comments followed the meeting of the 89th session of the OECD Steel Committee, which was held virtually in March.

Steel Market Update’s average hot-rolled coil price, meanwhile, now stands at $1,340 per ton ($67/cwt), an all-time high. That figure is also up 8.1% from $1,240 per ton a month ago and up 168% versus $500 per ton a year ago – during a price crash caused by the initial outbreak of the COVID-19 pandemic in the U.S.

But it’s not all roses for steel mills because steep increases in raw material prices have “worked to weaken average profit margins in the steel industry,” Zumkley said.

And it’s not just GDP that is forecast to rise, so too is global steelmaking capacity, which weighed in at 2.45 billion metric tonnes in 2020 and is expected to increase further because of governments sponsoring projects outside of their borders.

“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,” Zumkley said.

He did not mention any countries or regions by name, instead referring to “cross-border investments by SOEs” (state-owned enterprises). That might be a reference to Chinese steelmakers, some of which have been adding capacity at a rapid clip in Southeast Asia, for example.

Also of mounting concern is duty circumvention. “Such behavior is rising, as suggested by the increase in anti-circumvention investigations around the globe,” Zumkley said.

Case in point: The U.S. Department of Commerce in November self-initiated an investigation into alleged circumvention of antidumping and countervailing duties on oil country tubular goods (OCTG) from China. Commerce contends that Chinese steel was exported to Brunei and the Philippines, where it was minimally processed before being shipped onward to the U.S.

And while the steel market might need every ton it can get its hands on now, that won’t remain the case in definitely. “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,” Zumkley said.

By Michael Cowden, Michael@SteelMarketUpdate.com