Global demand for steel is heavily influenced by changes in the business cycle. This is particularly as it relates to the construction sector, both for dwellings and non-residential buildings and infrastructure but it is also a critical input into the manufacture of cars, trucks, ships, whitegoods and machinery and the like.
Having said that, it needs to be careful of over-achieving – that is, driving the economy into a hard-landing in other words.
The theme for businesses and policy makers alike is negotiating the current period of weak economic activity. Keeping things afloat until there is a pick-up in activity later in 2024 and into 2025 is critical and the income tax cuts from 1 July are likely to help consumer finances.
Financial markets continue to price in a faint possibility of an interest rate increase in the next few months yet continue to embrace a series of interest rate cuts through 2025. Upcoming news on inflation and unemployment will determine the interest rate outlook.
Global economic conditions continue to weaken and interest rate cuts have been delivered (or are priced in) in all major markets including the US, the Eurozone, China, Canada, the UK and New Zealand. The main issue for debate is the timing and magnitude of those cuts.
The Trump administration in the US is implementing a series of tariffs for steel. The function of tariffs is to raise the price of steel within the US (by the amount of the tariff) and the initial reaction in global markets has seen an uptick in steel prices. It is unclear whether this effect will be sustained into the medium term and what exemptions the Trump administration will allow, including possibly for Australia.
For Australian steel producers, these broad trends have added to what was already a weak period for the domestic economy where GDP eased to multi-decade lows (outside the effects of the COVID pandemic).
A key factor impacting the Australian steel industry is the price of energy. This is in part due to many years of poor government policy planning in relation to gas exports which has seen energy costs rise strongly. This has impacted margins and international competitiveness.
At the same time, as an energy intensive sector, the steel industry has been at the forefront of the transition to the use of renewable energy. This transition continues but the efficiency of the implementation of the move to renewables has been problematic. While Australian steel producers are active proponents of a transition to renewable energy and are leaders in the field, they generally remain cautious about the speed of change and ‘back up’ strategy given the long timelines involved.
The outlook for the Australian steel sector remains mixed.
There is likely to be positive news from an economic recovery in China and the rest of the world as easier monetary conditions start to take effect. A recovery in construction activity will be a key driver as will a more positive tone from manufacturing.
Within the Australian economy, there are some tentative positive signs. There is already a moderate recovery in dwelling construction, albeit from a low starting point, with new building approvals rising for 10 consecutive months since February 2024. This is the early response to the Federal government’s plan for the construction of 1.2 million new dwellings over the next 5 years, even if this is an optimistic target.
That said, the start of the interest rate cutting cycle from the RBA and signs of some moderation in cost pressures will add support to steel demand.
Another potential positive is the fact the government is aiming to support the steel sector. Through its Future Made in Australia strategy, it is looking to ensure that where possible Australian made steel is used in government investment activities. Support for steel producers is expected in defence, wind towers and other areas of infrastructure construction.
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