2023 will be a challenge for the steel industry

Dusseldorf The majority of European steel manufacturers want to start building new plants for climate-neutral production in 2023. First and foremost: the industry giants Thyssen-Krupp, Salzgitter, Arcelor-Mittal.

The planned projects will devour many billions of euros in the coming years.

For example, Thyssen-Krupp expects costs of two billion euros for the first phase of the transformation, the construction of a direct reduction plant. The calculation is similar for the competitor Salzgitter, which estimates around one billion euros for the first expansion step.

The rule of thumb here is that decarbonizing the production of one million tons of crude steel requires investments of around one billion euros. The industry is therefore dependent on government funding to handle the conversion. The companies have already received corresponding commitments from both the German government and the EU.

However, the manufacturers will probably have to shoulder around half of the investments themselves. The companies should be helped by the record profits that most of them made in 2022 thanks to unusually high steel prices.

At the same time, however, the World Steel Association expects that 2022 will have ended with a global decline in demand of 2.3 percent. Demand is likely to increase again in 2023 – but with growth of one percent, sales would still lag behind 2021, which was already characterized by the uncertain economic situation resulting from the corona pandemic.

Infrastructure ensures demand growth

According to the Worldsteel experts, the future increase in demand should be primarily supported by the infrastructure sector. However, the economic slowdown in China, persistently high inflation in many industrialized countries and rising interest rates around the world are working against this. In addition, many countries are likely to experience a recession, which could further dampen the already weak demand.

Deutsche Bank analyst Bastian Synagowitz also sees the industry facing difficult times for these reasons. The high steel prices of the past year in Europe have fallen noticeably again. “We believe that around 15 percent of the capacities in Europe are currently shut down,” said the expert in an industry study. “If the current situation continues, we expect even larger cuts.”

JP Morgan analyst Dominic O’Kane makes a similar statement. Overall, the risks in the steel sector outweigh the threats to growth in the USA and Europe, according to the industry expert in a recently published outlook for the metals and mining sector. He recommends selling shares in the German industry giants Thyssen-Krupp and Salzgitter.

Series: Industry Outlook

It can already be observed that many steel producers have reduced their capacities because of the unfavorable price level combined with high energy costs. The world’s largest steel manufacturer, Arcelor-Mittal, had already started shutting down individual plants in the fall because production was no longer profitable.

The steel prices fell from the record high of the spring, when at times prices of almost 1500 euros per tonne of hot strip were achieved, to a good 600 euros per tonne at the end of the year. As a result, many manufacturers have reduced their production and inventories, which meant that total production in Germany in November was almost 18 percent below the previous year, according to data from the Steel Industry Association (WV Stahl).

In order to ramp up production again, the industry is either dependent on higher steel prices – or on cheaper energy costs. The electricity and gas price brake planned by the federal government should only help a few companies.

Because the support measure is capped at 70 percent of consumption in 2021 – and is thus measured against a year in which many steel manufacturers produced significantly less than usual due to the lack of demand as a result of the corona pandemic. In addition, only companies whose profits in 2023 are 40 percent lower than in the previous year are eligible, which is difficult for many companies to predict given the uncertain economic situation.

Business associations are sounding the alarm

Industry associations such as WV Stahl, but also the Federal Association of the German Foundry Industry, the Steel and Metal Processing Industry Association (WSM) and the Hot-dip Galvanizing Industry Association have been sounding the alarm for a long time.

For many medium-sized industrial companies, the energy price brakes would bring very little relief, warns Christian Vietmeyer, general manager of the WSM. “These companies will have to fight for their existence in 2023.”

Large corporations such as Thyssen-Krupp have already announced that they will probably not be able to take advantage of the price brakes because of the profit requirements. It is still unclear to what extent the group intends to stick to its current decarbonization schedule.

At the balance sheet press conference in November, the group announced that it would prepare for the most difficult scenario for 2023. This also includes a restrictive and gradual release of investments – depending, among other things, on how the overall economic situation is developing, according to the company.

More: Three scenarios for the future of German industry

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