The World Steel Association (WSO) on Wednesday released its outlook for steel demand. The WSO expects steel demand to weaken this year. However, U.S. steel companies such as Nucor (NYSE:NUE), AK Steel (NYSE:AKS), and United States Steel (NYSE:X) can take heart from the fact steel demand in the U.S. is set to recover over the next two years. In fact, global steel demand will be driven mainly by a recovery in developed markets. But, a slowdown in steel demand in China will keep pricing under pressure.
Global steel demand
The WSO expects global steel demand to increase by 3.1% in 2014, down from growth of 3.6% in 2013. Steel demand is expected to grow 3.3% in 2015. Steel demand in the U.S. and the euro zone is set to recover, according to the WSO. However, this will be more than offset by weakening demand in China.
China's steel demand is expected to increase just 3% this year, down from growth of 6.1% in 2013. Steel demand growth in the world's second-largest economy is expected to decelerate to 2.7% in 2015. The weak demand forecast for China does not come as a surprise, given that the Chinese economy is rebalancing from investment to consumption.
In the U.S. and the European Union (EU), the story is different. Steel use in the U.S. is expected to grow by 4% this year, and 3.7% in 2015. In the EU, steel demand is set to grow by 3.1% in 2014 and 3% in 2015. This is a positive for steel industry in the U.S. and the EU, which has struggled over the last few years. In fact, an anticipated recovery in steel demand was the reason behind rally in shares of U.S. steel companies such as AK Steel and United States in the second half of 2013. But, the slowdown in China has meant that steel companies will not be able to capitalize fully on the expected recovery.
Pressure will remain
While the outlook for steel companies in the U.S. has certainly improved, they will continue to face margin pressure due to a surge in cheap imports, especially from China. In fact, steel companies in the U.S. have already raised concerns over this issue. Apart from severe weather conditions, Nucor had cited imports as a reason for weak first-quarter guidance. The company had noted that import levels continued to negatively impact pricing and margins at its bar and sheet mills.
The forecast from the WSO suggests that cheap imports from China could continue, given that demand growth in the country will decelerate over the next two years. I had noted in an article earlier this month that stimulus measures in the form of infrastructure investment could boost demand for steel in China. However, since then China has only announced a "mini stimulus" package despite the ongoing weakness in the economy.
Trade data for the month of March, which showed a drop in imports and exports, has further confirmed that the Chinese economy is slowing down. However, policymakers in the country seem determined to not implement a large stimulus package to boost economic growth. Following the release of weak trade data, Chinese Premier Li Keqiang ruled out short-term stimulus measures in a fresh sign that the country's policymakers are focused on rebalancing the economy.
All these would mean an increase in U.S. steel imports from China could surge, given the expected recovery in steel use in the U.S. and the fact that Chinese steel trades at a significant discount to that in the U.S. As a result, U.S. steel companies will continue to face margin pressure.
Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.