- Ongoing restructuring of key activities in the various segments of the metals sector (nickel, copper, zinc, rare earths, aluminium)
- Lower production costs for major global producers
- Products used in many industries across the world, notably in the manufacture of electrical batteries and aluminium components intended for use in electric vehicles
- The pandemic has impacted both supply and demand
- Low production capacity rates across the world
- Increased pressure from Chinese authorities to reorganise the steel and aluminium industries
- Highly dependent on Chinese economic policy
- Difficulties in ‘client sectors’ (construction, automotive)
The coronavirus pandemic led to a sudden halt in economic activity in the first half of the year, thus penalising the metals sector as a whole. Coface therefore anticipates a 4.3% drop in global GDP in 2020 and a +4.4% increase in 2021. Many client sectors, such as construction, aeronautics and automotive, have reduced their demand for metals due to the COVID-19 crisis.
According to SteelHome, quarterly averaged steel prices in the United States (U.S.), China and Europe fell by 26%, 0.3% and 7% respectively between Q3 2019 and Q3 2020. Iron ore, on the other hand, experienced an increase in price due to weather-induced conditions (in particular, numerous fires) in Australia and Brazil and mine closures in the latter. Its quarterly price climbed by 7% over the aforementioned period.
However, the economic recovery is underway, although it is disparate between countries and is heavily dependent on various public investment support measures, as well as on countries’ health situation with respect to the pandemic, which may, as applicable, give rise to renewed restrictions on movement to slow the spread of the virus. The recovery is also characterised by household consumption, on the global level, which remains below pre-pandemic levels, due to declining incomes and increased precautionary savings because of the uncertainty caused by the health crisis.
Sector Economic Insights
The coronavirus pandemic led, mainly over the first half of 2020, to drastic lockdown measures affecting economic activity. The metals sector was therefore adversely affected. Moreover, the metals sector, which is heavily dependent on global economic conditions, is expected to experience differentiated fates depending on the region. Europe and the U.S. are still battling the virus while Asian countries seem to have managed its spread. Coface estimates that 2020 economic growth will reach 1%, -8.3% and -3.7% in China, Europe and the U.S. respectively. Nevertheless, Coface anticipates a global economic recovery this year, with growth rates of 7%, 5.3% and 3.2% expected in 2021 in China, Europe and the U.S. respectively.
Global consumption of steel, copper and nickel is expected to increase by 4.2%, 5.1% and 10.5% respectively in 2021 according to the Australian Department of Industry, Science, Energy and Resources. Consumption will continue to rebound in China thanks to the stimulus measures implemented by the central government to tackle the consequences of the pandemic. An improvement in the trust of economic actors, in particular in the wake of the COVID-19 vaccination campaigns, which began in numerous advanced economies in late 2020, coupled with a gradual economic recovery in most countries in the world, is liable to stimulate demand for metal consumption, which is expected to improve overall, despite ongoing uncertainties and difficulties. Mine closures have occurred in the largest producing countries, where recovery is taking different forms. The mining region of Antofagasta in Chile, where the world's largest open-pit copper mine (Chuquicamata) is located, is the region of the country most affected by the COVID-19 epidemic, after the capital Santiago. To cope with the virus, the number of workers in the mines has been reduced, resulting in a drop in production. However, the rebound in Chinese demand for key industrial metals enabled quarterly averaged prices to surge by 14% for aluminium, 22% for copper, 16% for nickel and 19% for zinc between Q2 and Q3 2020. The net margin ratio for the various segments analysed by Coface (steel, copper, nickel, zinc, etc.) decreased between Q3 2019 and Q3 2020. Globally, the iron and steel industry recorded a negative net margin ratio for Q3, reaching -0.1 %, whereas it was 5.8 % in Q3 2019. Only the copper industry seems to have somewhat stabilised its profitability in the last year. Metallurgical activity in Asia is recovering more steadily than in other major world markets, since lockdowns were brought in earlier there. The worldwide reopening of the mines over the last year, mainly starting in Q2 2020 and which is ongoing, will enable an increase in supply, which is determined by the gradual upturn in activity in the construction and automotive industries, the main users of steel products. This recovery is disparate, depending in particular on different regions of the world.
Steel production has increased by 1% in China while the European Union and North America have experienced declines of 18% and 17% respectively in 2020.
In China, where measures have been eased since April 2020, the recovery has been enabled by the central government's infrastructure projects. By the end of June 2020, steel production in China had returned to its pre-COVID-19 level. Between February and November 2020, the capacity utilisation of steel plate plants in the country increased by 26 percentage points, from 70.5% to 96.7%.
In India, demand for steel decreased by 90% in April 2020 due to lockdown measures. Despite less stringent measures, migrant workers who have returned to their villages refuse to return to construction sites by fear of catching COVID-19. Authorities in the state of Maharashtra, of which Mumbai is the capital, estimate that 80% of construction workers have left the financial capital of the country.
In Europe, demand for metals, linked to the recovery, is also reliant on public infrastructure as demand from the private and non-residential segment is declining due to lower income and investment. According to the European Steel Association, Eurofer, construction output is expected to decline by 3.6% in 2020 before rebounding by 5% in 2021. The construction sector however, which is less responsive to the economic situation, is more resilient than the automotive and mechanical sectors, whose output are expected to decline by 20.6% and 11% respectively in 2020, before rebounding by 18.1% and 7.4% respectively in 2021, according to Eurofer.
In the United States, where the epidemic is not yet under control, the decline in steel demand and production is expected to continue. According to the ISM (Institute of Supply Management), the Manufacturing Index reached 57.5 in November compared to 59.3 in October, demonstrating the fragility of the manufacturing sector.
At the time of writing, over the past year, South America was dealing with a heavy circulation of the SARS-CoV-2 virus. Due to the measures taken by the authorities to combat the pandemic, the industrial sector has been adversely affected by the situation. In Brazil, the country most affected by the epidemic in South America in 2020, industrial production was stagnant in October after several months of decline. The Brazilian construction and automotive sectors are also suffering from the COVID-19 crisis. Global Data predicts a 6% contraction of the textile industry in 2020 and, according to Ward’s Automotive, vehicle production at the end of October 2020 had decreased by 40% year-on-year.
Trends in the prices of the main metals reflect the trends of the economic and health crisis. After declining in response to the COVID-19 crisis, prices of major metals are on the rise. According to SteelHome, average quarterly steel prices in China and Europe increased by 9.4% and 6.5% respectively between Q2 2020 and Q3 2020. Over the same period, the price of steel in the United States fell by 3.6%. Nevertheless, quarterly iron ore prices surged by 17%, an uptick which is denting steelmakers’ margins. Metal prices in 2020 are still lower than in 2019, but are expected to rebound in 2021 due to increased activity in client sectors in the manufacturing industry. Despite these difficulties, the steel industry as a whole is still a profitable activity in its main markets. It is proving itself to be more resilient in this COVID-19 crisis than during the subprime crisis in 2008-2009. It should be noted, however, that it is the companies with the lowest costs and more sustainable demand that were able to limit the negative effects of this global shock.
In the mid-term, the need to reduce the sector's environmental impact and the continued development of electric engines is expected to continue to have a major impact on its business.
The development of wind and solar energy, as well as the democratisation of the electric car, require very large quantities of copper and nickel. A car with electric propulsion contains 3 times more copper than a car with thermal propulsion. For nickel, the differences can vary from between 3 to 30 times, depending on the technologies and technical characteristics of the vehicles. Car manufacturers, who are looking to reduce the weight of vehicles, will eventually favour aluminium, which is 10 to 40 times lighter than steel. This will help increase the vehicle's autonomy.
In line with the development of a Green Deal, a programme of investment in green energy, the European States are trying to build a consensus to make the continent's economy sustainable, particularly through the exploitation of natural resources. Thus, the demand for metals and alloys such as aluminium, nickel, palladium and platinum will grow in the coming years. We anticipate that small and medium-sized companies in the metals sector will face difficulties, as the transition of the sector will require heavy capital expenditure, particularly in R&D and in the extraction of ore.
Last update : February 2021