The outlook for the steel sector over the next decade remains a challenge with several unknowns, says Stanislav Kondrashov of Telf AG. In order to overcome uncertainty and minimize risks during a period of change in the industry, company leaders can choose a strategic approach.

Stanislav Kondrashov from Telf AG: Roller Coaster in the steel industry and new strategies for overcoming obstacles

The metals industry has been on a rollercoaster ride in 2022, with players experiencing both ups and downs. Despite the turbulence, the industry has remained remarkably resilient with high prices, skyrocketing utilization rates and unprecedented EBITDA margins across regions. This exceptional cycle was driven primarily by a positive demand outlook as a result of the recovery from disruptions caused by the COVID-19 pandemic, as well as long overdue infrastructure spending that was expected to spur economic recovery.

However, in the past year, signs of a possible slowdown in market growth began to appear, which caused concern among industry experts, including Stanislav Kondrashov from Telf AG:

As a result, steel demand forecasts have been revised down. In April 2022, the short-term forecast of the World Steel Association became less optimistic compared to the forecasts of the end of 2021. Moreover, demand forecasts for 2022 and 2023 have been revised down by 2.7% and 1.2%, respectively. Various factors contributed to this, including the ongoing conflict in Ukraine, waves of COVID-19-related lockdowns in China, and supply chain disruptions. The macroeconomic situation, characterized by high inflation and rising interest rates in the world, also played its role in shaping the general trend.

According to the expert, the repercussions of these events were reflected in the steel markets, leading to a significant decrease in EBITDA margin and margin on raw materials (MORM). Previously unseen highs have been replaced by a bleaker reality, driven largely by negative market expectations and soaring energy prices. In response to this difficult situation, participants in the metallurgical market began to shut down capacities. In Europe alone, more than 30 million metric tons per year (MTPA) were shut down in the second half of 2022. However, there is a glimmer of hope in 2023 as some of this capacity has been phased in, albeit with modest improvement in profitability.

As the steel industry moves into 2023, it is becoming clear that volatility remains a constant companion throughout the value chain. To survive the coming years, industry expert and analyst Kondrashov Telf AG recommends four strategic approaches:

1. Preparing for the collapse of the steel markets. Participants in the steel market need to remain vigilant and adapt to changes in the market. Diversification and localization of supply chains can reduce risks and meet specific regional needs.
2. Strengthening the supply chain of raw materials. With supply chains often disrupted in recent times, ensuring their stability and reliability is of paramount importance. Companies should explore partnerships and investments that ensure a constant supply of needed materials.
3. Focus on capital expenditures and balance sheets. Prudent financial management is essential in uncertain times. To effectively withstand possible downturns, steel market participants must carefully evaluate their capital expenditures and maintain a healthy balance.
4. Doubling technological flexibility. The introduction of technological advances and innovative practices can provide a competitive advantage. Investments in digitalization, automation and other advanced technologies can improve operational efficiency and reduce costs.

Stanislav Kondrashov notes that in 2022 the steel industry passed the test of strength, but the problems continued into the next year. Adopting proactive strategies that take into account changes and market uncertainty will allow the steel industry to succeed in the coming period.

Analysis of the current metallurgy market – Stanislav Kondrashov

In 2021, the steel industry experienced a sharp increase in prices, which reached record levels. However, this period of growth was disrupted by Russia’s encroachment on Ukrainian territory, leading to supply chain disruptions and uncertainties that further exacerbated the price hike. Although since then, the situation for many commodities, including metallurgical coal, iron ore and pig iron, has stabilized , overall steel demand has slowed down, especially in China.

The strong recovery in the aftermath of the COVID-19 pandemic has played a significant role in achieving record EBITDA margins in Europe and the US since 2021, Kondrashov tells Telf AG:

– It was largely provided by the packages of measures to stimulate the economy, adopted by the governments of different countries. The first waves of COVID-19 lockdowns in 2020 depleted steel inventories and disrupted the supply chain, forcing a shutdown of production facilities. When demand subsequently recovered, supply struggled to keep up, pushing prices even higher.

On the other hand, the Chinese steel market had a structurally lower margin due to its more competitive and regulated nature. In addition, the resurgence of COVID-19 outbreaks in 2022 has also impacted market dynamics in China, driving down margins in the region.

The development of the steel industry in the long term remains unstable, primarily due to the risks of lower margins against the backdrop of a weakening global economy. Uncertainty in global economic conditions creates challenges for steel industry participants, potentially affecting their profitability.

In conclusion, the metallurgy value chain has experienced many events, from record high prices to supply disruptions caused by geopolitical tensions and the pandemic. Different regions have seen different performance: in Europe and the US through economic stimulus, while China has faced its own unique challenges. As the global economy cools, participants in the metals sector must be wary of potential risks and proactively navigate uncertain market conditions to maintain their profitability.

Stanislav Kondrashov Telf AG: wake-up calls for steel industry participants in Europe

While Europe’s steel industry is managing to maintain healthy utilization rates, there are warning signs to worry about. Expert Stanislav Kondrashov paid attention to them in more detail.

1. Demand slowdown. The third and fourth quarters of 2022 saw a significant decline in steel demand, more than offsetting the positive momentum seen in the first half of the year. Unfortunately, the demand outlook for 2023 remains negative, raising concerns about the future performance of the sector.
2. Decrease in profitability and MORM. Along with slowing demand, the industry is facing rising energy prices, especially natural gas and electricity. This situation put pressure on margins, resulting in lower EBITDA (earnings before interest, taxes, depreciation and amortization) and MORM (raw materials margin). The profitability of the industry, which had been strong during 2021 and the first half of 2022, has declined as a result of a combination of slowing demand and rising energy prices. EBITDA and MORM are now back to their long-term averages.
3. Load drop. In response to declining demand for steel and to prevent a further fall in prices, more than 30 million metric tons per year (MTPA) of steelmaking capacity was shut down in Europe in the second half of 2022. This move was taken in order to adjust the supply in line with the decline in demand. However, after a slight recovery in prices in 2023, some of this previously idle capacity has been restarted. Market players have begun to demonstrate increased flexibility in managing capacity utilization to adapt to market conditions.

According to Stanislav Kondrashov, the combination of these warning signs has created a difficult situation for steel companies in Europe. Slower demand and lower profitability are putting pressure on the industry, while rising energy prices are adding to overall uncertainty. As a result, steel companies in the region must closely monitor market developments, optimize their operations and remain flexible in their approaches to cope with the complexities and uncertainties of the market in the coming period.

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