The key external factors of influence will be the situation in the economies of China and Turkey, and the policy of the world’s central banks
The major measurable risks facing the Ukrainian iron & steel industry next year are a decrease in steel production and consumption in China, and an economic crisis in Turkey. According to the results of study 2021 Challenges/2022 Risks of Ukraine’s Iron & Steel Industry, conducted by GMK Center analysts, these two factors of influence may cost Ukrainian steel companies a decrease in revenues of approximately $5.5 billion and $750 million respectively.
The most significant risk for the Ukrainian iron & steel industry in 2022 is a possible decrease in prices for raw materials and steel products. This factor largely depends on global market pricing which, in turn, is tied to the Chinese economy.
The consensus forecast for iron ore prices in 2022 shows a 33% decrease in average prices. This will cause a drop in Ukraine’s revenues from iron ore exports by $2.3 billion. China’s plans to boost its own production of iron ore and to increase the share of EAF steelmaking create certain long-term risks for the iron ore market.
“Only because of decrease in raw material prices, the average steel prices may fall by 20% in 2022. This will cause a $3.2 billion decline in steelmakers’ revenues,” explains Andrii Tarasenko, GMK Center Chief Analyst.
Another measurable factor of influence is a full-on economic crisis in Turkey, which is to come if the discount rate keeps falling against the backdrop of high inflation in the country. This has already resulted in a record fall of the Turkish lira against the dollar.
High inflation and lira depreciation may disrupt the macroeconomic stability and adversely affect steel consumption in the country. Turkey is an important market for Ukraine.
The possible damage of $750 million is calculated as difference between the volume of exports from Ukraine to Turkey in 2021 (up to 2.3 million tons) and in 2019 (1.3 million tons), which was a recession year for Turkey, at the average prices of 2021.
Other factors, the influence of which is currently difficult to estimate or which may prove vain, include:
1. Crisis in China’s real estate market.
At once several of the country’s largest developers found themselves on the verge of default. This situation can undermine the credibility of real estate investments. Authorities have officially refused to bail out the troubled companies from bankruptcy.
According to Andrii Tarasenko, the key risk for 2022 depends on whether China will extend its incentive programs. It has already been officially announced that the government planned to stimulate the real estate market through the implementation of affordable housing projects and the allocation of funding for loans, which would support steel consumption.
2. Global inflation rising.
The global economy is experiencing an inflationary shock from high prices for energy and some raw materials. A weighty reason for the rise in prices was also the insufficient supply in many sectors of the economy influenced by the incentive programs. As a result, the annual inflation rates in many major economies have exceeded their multi-year highs. In this context, the world’s central banks will be forced to tighten their policies, which will cool off the economy and adversely affect the steel demand.
3. Escalation of conflict with Russia.
The media campaign to escalate the situation speaks of the low probability of Russia’s invasion and looks more like an attempt to exert pressure. At the moment, there are the most favorable conditions for Russia to achieve its geopolitical goals. However, if the military invasion does take place, damage to the Ukrainian economy in general and steel industry in particular will probably be enormous.