European steel: mind the gap

In La Tribune 17/01/2020

World steel supply

Between 1950 and 2019, world steel production increased almost tenfold. At nearly 1.9 billion tonnes, it was more than 51% Chinese last year. By replacing old steel mills with new ones, Beijing has reduced its production capacity by 14% since 2014, but its utilization rate has increased to 90% compared to 70% in 2015. China’s steel industry is more efficient, but exports less because it consumes more. The European Union is six times smaller, producing only about 160 Mt. At around 110 Mt, India continued to make progress with a view to doubling its capacity by 2030, while Japan remained stable at over 100 Mt. Lower down, the United States was at around 86 Mt and South Korea at 71 Mt. Overall, Asia produces more than 70 % of the world’s steel, and its domination of the steel industry is far from over.

Chinese demand up 9%.

In 2019, the apparent world demand for steel outside China was down by about 2%, conversely, Beijing’s apparent steel consumption increased by about 9%. How can this be explained?

The European, American, Japanese or Australian steel peak occurred at almost coincidently, in the mid-1970s. At that time, the average Australian consumed about 220 kg of steel per year, the European 500 kg, the US 800 kg, and Japan 900 kg. In 2008 the peak for South Korea was close to 1250 kg. Thanks to the Chinese urbanization policy still in progress, the Chinese steel peak will only occur after 2025 and it will be between those of Japan and Korea and, like Taiwan, around 1000Kg whereas per capita consumption is currently only 600 kg. In comparison in 2018, the average Indian consumes 72 kg. But after China’s steel peak, within 10 years, Eastern overcapacities will be available to flood the world.

Negative steel trade balance

In decline since 2012, European Union steel exports were 20.5 Mt in 2018. For the past 10 years, Europe has no longer had the vocation to supply emerging countries, which now produce steel or import it from Asia since China exports more to Africa than to Europe. In addition, the trade war with the United States results in the loss of more than 1 Mt per year. For their part, the Union’s steel imports have been increasing since 2013 and will balance in 2018 at more than 29 Mt. Our steel trade balance was therefore negative at 9 Mt. For 2019 this balance will still be negative, probably around 6 Mt. Generally speaking, China is immediately accused of being the cause of our steel problems. This was the case in 2015 and 2016 when its world exports peaked at 100 Mt. But they have since stabilized at around 60 Mt, then declined to 52 Mt in 2019 and are projected at 38 Mt for 2020. In addition, Chinese imports are increasing in response to Beijing’s steel peak. China is no longer the problem, yet Europe’s steel trade balance remains in deficit. Who has replaced China?

European imports and modernisation

Our first disappointment between our “exports to” and “imports from” is with South Korea, and the danger is that this weakness has been increasing every year since 2008. Are border barriers, voluntary restraint agreements and quotas sufficient? Secondly, there is a country with which the Union had a surplus until 2017, but the balance has been totally reversed in the last 3 years, it is Turkey. It is the hub of the world scrap metal trade. Thanks to its technological choices of electric arc furnaces and although its electricity price is higher than in France, it re-exports our remelted scrap to us in the form of excellent steel as we consume it. Recycle our scrap ourselves and Turkish steel collapses. Alas, the resistance to industrial change and investment in this highly ESG-intensive sector is worrying decision-makers. Yet in the United States the famous “minimills” recycle 70% (and soon 75%) of steel production, compared to 40% in Europe, and the US steelmaker Nucor is doing very well. This industrial inertia in Europe is perhaps one of the hidden reasons for the emergence of a hydrogen industry: to safeguard the integrated model of blast furnaces thanks to H². Conversely, Iran, which produces 80% of its 25Mt via its hydrogen industry, because it has abundant and virtually free natural gas, operates 90% of its production with electric arc furnaces.

Then come Russia and in fourth place China, almost on a par with Ukraine. Chinese exports to the EU are declining as its domestic demand increases. Our Chinese deficit is 70% lower than that of South Korea. Moreover, the biggest Chinese steel importers are South Korea, Vietnam, Thailand, the Philippines, Indonesia and India. The largest European importer, Italy, is in 14th place. Much later, China will prefer to sell us a ton of steel in the form of cars rather than crude steel.

Our deficit with Taiwan, which has been growing steadily for the past 10 years, as it has for South Korea, is worrying. Then comes Serbia, whose Smederevo steel complex, owned by the Chinese group HBIS since 2016, is once again becoming a substantial and competitive European producer. This is the European steel stage of the Silk Roads and the start of a Chinese-style industrial park in the heart of the Balkans: a sort of special economic zone modelled on the Morowali industrial park in Indonesia and equipped by Peking steelmakers. Located near the Indonesian nickel mines, it is intended for the battery industry. Precisely, less than 1000 km from the city of Smederevo is the Greek nickel mines, suivez mon regard. The rescue of British Steel by the Chinese group Jingye is to be contemplated in this context of game of Go : surround and suffocate.

Much further on, after Belarus, Brazil or Moldova, appear three countries with which the Union was in surplus until a few years ago. They now export at high speed to Brussels: Vietnam, Indonesia, and Malaysia. Since none of these three countries has reached its steel peak, why do they export so much to Europe instead of favouring their own consumption linked to their demographics and urbanisation? They are suspected of processing Chinese steel sold at a loss and then exporting it to Europe, but they are also competitive because, like Turkey, they send us back our scrap that they have processed into steel.

Dark Future ?

Prior to 2008, EU steel production was stable at around 200 Mt. After the crisis, it fell by 20% and has not recovered since. It remains the second largest in the world, and although it still represents 330,000 direct jobs, its future has a reputation for being bleak. And yet the Union has an inventive steel industry at the centre of a Europe that claims to be industrial, but it is true that, without reform, it could collapse to the level of the United States, in other words be halved. At that point, will a sort of European Trump, without resolving the problem, belatedly make the observation that steel has become a critical and strategic metal? Critical because European steelworks would be on the verge of extinction; strategic because steel would still be indispensable to the Union’s transversal industrial policies such as those of energy transition or electric mobility: recharging stations, new resistant and competitive grades for chassis and battery, electric motor steels… How can we keep European steel without hindering consumer protection, Brussels wonders? The answer is certainly in decarbonised borders and the modernisation of integrated steelworks, but also in investing and recycling our scrap with the aim of drying up competition. Otherwise, in 10 years’ time, after the steel peaks in the Pacific and when Asia has a large stock of scrap, the risk will be drowning under a flood of Asian steel.