Urgent need to secure the steel value chain

Statement by Mr Ulf ZUMKLEY, Chair of the OECD Steel Committee

91^st session of the Steel Committee, 29-31 March 2022

 

At its 91^st session held on 29-31 March 2022, the OECD Steel Committee held in-depth discussions about the impacts of the large-scale aggression by Russia against Ukraine on global steel markets and the outlook, and ways in which the Committee could work together to bring greater stability to steel markets and support Ukraine’s eventual recovery from the war.

Delegates of the Steel Committee:

• Exchanged views on the implications of the war in Ukraine for global steel markets, noting the sharp negative effects along the entire steel supply chain. The effects include a decline in global steel demand growth this year and supply side shocks on products ranging from key raw materials to finished steel products.
   
• Explored possible practical support that the Committee could provide to Ukraine as part of the call by the OECD Council on 8 March 2022 for the OECD to contribute to eventual recovery and reconstruction. Members also explored options for sourcing alternative steel-related materials as a way to stabilise global steel markets.
   
• Agreed to further the Committee’s analytical work on structural problems facing the steel industry, and to promote policy settings towards a level global playing field for steel, in particular by:
   
  • Building further transparency of subsidies and other government support measures, carrying out analytical work to understand their impacts, and developing evidence-based policy recommendations on the use of these measures.
     
  • Better understanding the implications of state-owned enterprises (SOEs) for the health of global steel markets, and renewing their call for such enterprises to act in accordance with market principles.
     
  • Monitoring potential trade measure circumvention in steel using new tools developed by the OECD and working together to help prevent these practices.
     
  • Monitoring new low-carbon steel projects, not only to better assess the implications and impacts for the sector (whether in terms of capacity or industrial development), but also to identify and anticipate related challenges.
     
  • Monitoring excess capacity, which stood at 544 million tonnes in 2021 and has remained at persistently elevated levels since 2018, highlighting the need for further capacity reductions in the relevant jurisdictions. 
     

Global steel markets impacted severely by Russia’s large-scale aggression against Ukraine

While global steel markets were recovering throughout 2021, the outlook has worsened significantly since Russia’s large-scale aggression against Ukraine began. Even before the war started, steel market activity was slowing in response to growing economic uncertainties, and risks were building. Increased stress on global supply chains, including semiconductor chip shortages, rising energy costs and the prospects for higher interest rates due to accelerating inflation were dampening industrial activity and global demand for steel.

While recognising that the most important consequences of the war are human in nature, participants of the Steel Committee discussed the significant implications that the conflict is having on global steel markets. The impacts are being felt directly as a significant negative supply shock on steel and raw materials from Russia and Ukraine, affecting the European steel industry in particular, leading to surging steel and raw material prices. The global steel industry is also suffering from indirect impacts such as higher energy and production costs as well as a slowdown in global economic growth that will dampen steel demand considerably going forward. Participants discussed the impacts of the crisis on steel demand growth in different regions and economies, noting the developing stagnation and potential declines in global steel demand this year.

Wider impacts are harder to predict, but in case the conflict continues longer term, implications may include a further fragmentation of steel value chains, a slower transition towards decarbonisation of the steel industry through rising costs and reduced incomes, and, in some OECD countries, challenging access to gas supplies. Pressures for higher defence spending and changes in the structure of energy markets could also affect the steel industry in different ways. 

 

Support for recovery of Ukraine’s steel industry

Ukraine has a longstanding and active role in the Steel Committee. The steel industry plays a critical role in the Ukrainian economy, and steel will play an equally critical role in the country’s eventual recovery and reconstruction from the war. The Committee agreed that the diverse expertise, knowledge and experience of its membership could be mobilised to help the recovery of Ukraine’s steel industry and related supply chains, as a practical way to support the country’s recovery process and as part of the call by the OECD Council on 8 March 2022 for the OECD to contribute to eventual recovery and reconstruction. In this context, members agreed to revisit their programme of work to accommodate work to support Ukraine’s recovery.

In view of the negative supply shock caused by the war on steel-related materials, and the need to bring greater stability to steel markets, members called on the Committee to explore ways to secure the steel supply chain as a positive way to help the steel industry, and to ensure unobstructed trade flows of construction steel products to Ukraine for the eventual rebuilding process. The Committee agreed to examine export restrictions and interdependencies along the steel supply chain more closely, to explore ways to coordinate better access to raw materials, and to engage more closely with interested non-OECD partners to encourage dialogue on these issues.    

 

The Committee will strengthen its work on structural issues for a level playing field in global steel markets

Industrial production has returned to its pre-pandemic levels. At the same time, higher costs incurred by the manufacturing sector, up to an all-time high for producer price indices during the second half of 2021, weighing down on demand. In addition to exploring practical ways to help offset some of the more immediate steel-related challenges stemming from the war, members of the Committee are committed to furthering their work on longer-term structural issues facing the industry and policy solutions to these challenges. In this context, the Committee discussed its work to build transparency on government subsidies and other measures that can hinder market function and contribute to excess capacity in the steel sector, including via SOEs, new evidence of possible trade circumvention and its impacts, and climate-related challenges and relevance for the work of the Steel Committee.

Members agreed to strengthen the Committee’s important work on building a database of subsidies and government support measures in key steel-producing jurisdictions, and to explore future analytical work that would analyse the impacts of these measures, particularly on excess capacity. The gap between global capacity and production has remained elevated over the past several years, stabilising at a level of 544.1 mmt in 2021. The latest OECD analysis suggests that excess capacity is likely to continue growing, with a total of 88.5 million metric tonnes (mmt) of capacity underway for completion, while an additional 73.3 mmt are in the planning stages for the 2022-24 period. Capacity growth is being driven by investment activity particularly in EAF and carbon-intensive BOF facilities in the Middle East and Southeast Asia, respectively. Should all the projects be realised, global steelmaking capacity could increase by 6.6% from its level of 2 454.3 mmt in 2021, adding to supply side pressures for the steel industry because many of these facilities are being built specifically to export their production.

SOEs have played an important role in global capacity developments. The Committee discussed an interim report showing substantial growth in SOE steelmaking capacity since 2000, which accounted for 21% of global steelmaking capacity in 2021. This growth has been primarily attributable to China, potentially supported by subsidisation via market-distorting instruments. Such practices can help keep financially unviable steel enterprises operating in the market, causing inefficiencies in their respective domestic steel markets and in the global steel market.

Market-distorting government interventions contribute to unfair trade practices that harm domestic steel markets. While trade defence instruments are used to address unfair trade practices, new OECD empirical analysis shows that the extent of circumvention of legitimate trade remedy actions appears to be quite common in the global steel markets. A large share of the potential circumvention behaviour identified is associated with antidumping measures initiated in 2015, at the onset of the steel crisis. Most of the potential circumvention behaviour appears to involve Viet Nam as an intermediary economy and China as subject economy. The Steel Committee agreed to further study trade circumvention trends based on the tools developed by the OECD, and to foster cooperation amongst its members to better understand and reduce circumvention.

 

Related

• OECD work on steel