HIGH RISK for entreprises
A recession was avoided in 2019, but no rebound is on the cards for 2020.
Inflation expectations are best revealed by those who have skin in the game.
For every drop by 1 percentage point in interest rates, savings rates increased by 0.2 percentage points in Europe.
What to Watch?
A more balanced market and continuation on the pathway to eliminating overcapacity should support profitability in the global steel sector. Infrastructure investment, improving European demand and sustained economic growth in the rest of the world are the main drivers. Cyclical recovery continues to underpin growth, yet world steel demand growth will slow, to +1.6% y/y from +2.8% in 2017, due to slowing growth in China (environmental restrictions, policy induced restructuring of the economy). Excluding China, the World Steel Association forecasts demand growth of +3% y/y for 2018. Europe is the strongest region in terms of demand growth with +5.2% y/y. Global steel output increased by +5.3% in 2017, principally on the back of strong growth in China. Even though, average capacity utilisation has improved in 2017, it still stands below 70%. Overcapacity, exacerbated by slowing Chinese demand, remains the principle challenge of the sector. Iron ore may slip back into oversupply as transitory demand switch between grades reverses.
Other metals have seen prices increase on the back of strong demand, notably copper, nickel, lithium and cobalt, the latter ones particularly prospects for batteries and electronics. Restraint on supply expansion is likely to lead to a continuation of demand growth exceeding incremental supply. Strong balance sheets and cash flows could drive M&A in the sector. However, we note risk in relation to the correlation with other sectors, notably construction in China, chiefly for copper.
Iron ore: Prices rose late 2017/early 2018 on the back of demand switch, but Chinese port inventories stand at record highs
Steel companies: Global overcapacity but the high level of import taxes protects some specific markets such as US and Canada
Nonferrous: The sector has returned to earnings growth on the back of strong price recovery. The LME Index has risen 17% in 2017
These assessments are, as always, subject to the disclaimer provided below.
This material is published by Euler Hermes SA, a Company of Allianz, for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by Euler Hermes and Euler Hermes makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the Euler Hermes Economics Department, as of this date and are subject to change without notice. Euler Hermes SA is authorised and regulated by the Financial Markets Authority of France.
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