The IMF just released its latest World Economic Outlook. The WEO includes world gdp growth forecasts for 2008 and 2009. Not surprisingly, world growth is expected to decelerate to 4.1% in 2008 and 3.9% in 2009, compared to 5.1% in 2006 and 5.0% in 2007.
What does this mean for global steel demand growth? The steel nerds have looked at the historical relationship between world gdp growth and steel demand - read the post here. Based on this relationship, world steel demand is expected to grow by 50 million tonnes per year in 2008 and 2009, down from an average growth of 70 million tonnes per year in the 2002 to 2007 period. Of course there are factors other than gdp growth that influence steel demand, but the relationship between the two is pretty good and provides a simple heuristic for measuring the impact of an economic slowdown on steel demand.
It will be interesting to see what adjustments the IISI makes to its global steel demand forecast when the next outlook is released. The last Short Range Outlook released in April of this year projected steel demand growth of 80 million tonnes per year in both 2008 and 2009. Of course, global economic conditions have continued to deteriorate since April.
Below is a presentation I made to the Steel Manufacturers Association’s annual members meeting in Washington, DC on May 20, 2008. The title was “Black Swans in the Steel Industry: What do They Mean?” (Of course the title is taken from the best selling book by Nassim Nicholas Taleb.) My presentation identifies what I believe are a few very significant recent developments in the industry and argues that these black swan events are manifestations of the seismic and systemic changes the industry is undergoing. Of course once you’ve seen a black swan, your perception of swans is forever changed.
Goldman Sachs reported today that it believes the US economy will suffer a recession in 2008, and Goldman is not alone. It seems everyone is worried about the impact of the credit crunch and high energy costs on US consumers. So, what might a recession mean for shipments by steel producers in the US in 2008?
There is clearly a correlation between GDP growth and steel demand. In developed economies, such as the US, the rule of thumb is that GDP has to grow at a base line level or steel demand contracts. In the US, the rule is pretty simple: If GDP grows by more than 2.5%, steel demand tends to rise. Conversely, steel demand falls when GDP grows by less than 2.5%. You can see this in the graph below. (If the graph is hard to read, click on it and it will enlarge).
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Until a few years ago the steel industry was considered mature, and the moniker was accurate. Global steel demand grew more slowly than did the world’s population. In much of the developed world, demand for steel was stagnant after having gone through a long period of decline. Since 1998, however, the steel industry seems to have re-ignited its growth engine and kicked into a new gear. The industry has been growing at 6% annually and most analysts see strong growth continuing for a decade or more. What explains the steel industry’s reemergence and can it continue?
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