Growth in demand for steel is set to drop off amid a slowing world economy and weak manufacturing and construction activity.
Those factors will help to restrain construction input price growth to moderate levels but will present further challenges for a steel industry in Australia which is already suffering from falling world prices, subdued demand and a high Australian dollar.
In its October 2012 Short Range Outlook, the World Steel Association (worldsteel) says it expects growth in the overall demand for steel around the world to drop from 6.2 per cent in 2011 to 2.1 per cent this year and 3.2 per cent next year.
Though worldsteel has not issued specific forecasts for Australia, it predicts growth of 5.9 per cent in demand for the Asia and Oceania region in 2011 will drop to 2.4 per cent this year and 2.8 per cent next year.
Worldsteel economics chairman Hans Jürgen Kerkhoff says the latest forecasts, which follow a downgrade in global economic expectations from the International Monetary Fund, reflect deteriorating conditions in the world economy, especially a sharper than anticipated slowdown in China.
“Earlier this year we were seeing some signs of recovery from the slowdown of the last quarter of 2011 and we expected a better second half performance in 2012,” Kerkhoff says. “However, the economic situation deteriorated during the second quarter of this year due to continued uncertainty arising from the debt crisis in euro zone and a sharper than expected slowdown in China.”
“These factors have weighed heavily on business confidence and manufacturing activities around the world. As a result, momentum in both the developed and emerging part of the world weakened considerably,” he adds.
Kerkhoff does say, however, that demand will recover slightly next year provided that the crisis in Europe can be contained, the US is able to deal with its impending fiscal cliff and the Chinese government is able to facilitate a soft landing for the Chinese economy.
Along with slowing demand, steel producers around the world are being hit by a build-up in inventory resulting from overproduction in China, which is then sold onto world markets and impacting prices. Earlier worldsteel figures released last month show that the world is currently consuming just over three quarters of the volume of steel it has the capacity to produce, and data from MEPS Ltd shows that prices have fallen by nearly twenty percent since their peak in April last year.
While this provides a short term benefit for Australian builders in terms of reduced upward pressure on input costs, it further reinforces fears about the viability of steel making in Australia and a hollowing out of the domestic supply chain as steel makers pare back capacity and manufacturers such as BlueScope and Arrium (formerly OneSteel) face an uncertain future.