Alfonso Hidalgo, Director of Economic Studies at UNESID, the Union of Steel Companies, recently explained during a webinar the factors contributing to the steel shortage—a problem impacting not only Spain but many international markets. According to Hidalgo, what we are seeing is a “perfect storm.”
Hidalgo noted that the negative Euribor rate, corporate loan interest rates below 2%, and similar indicators clearly reflect an expansionary monetary policy. In addition, financial markets—stock exchanges—are at very high levels, and "raw materials are emerging as another source of investment and yield for investors, which is certainly a factor to consider," he emphasized.
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"Bullwhip Effect" in the Value Chain
From the perspective of the value chain, Hidalgo referred to the "bullwhip effect," which results from "an information asymmetry between actual demand and the manufacturer’s perception of that demand." This effect gets "distorted," and as demand begins to rise, "orders accumulate and may reach manufacturers in a volume greater than what is truly being driven by end consumers."
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Rapid Recovery of the Industry
According to Hidalgo, this situation has emerged due to "a moment of very rapid recovery in the industry." In fact, the latest EU industrial confidence index has seen a sharp increase—"although this doesn’t necessarily reflect actual production levels," he clarified. "We’re seeing very rapid growth," he added, "because we’re coming from a very low baseline," which "creates the perfect environment for the bullwhip effect to take place."
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China Reduces Steel Exports
"China," he explained, "is a net exporter and has been a major disruptor in the global steel sector due to the aggressive scale of its exports." However, in 2020, for a period of three months, "it became a net importer." While it has since returned to being a net exporter, "the Chinese government is now pushing to reduce steel exports so that production remains within the country."
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Inventory Reduction in 2019
The Director of Economic Studies at UNESID also pointed to low inventory levels as a contributing factor. "We were already coming off a year of low inventory levels, as 2019 had been a poor year." According to Hidalgo, both in Spain and across the EU, the steel sector experienced a downturn in 2019—despite ongoing real demand, purchases declined.
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Shutdown of Facilities
Lastly, Hidalgo explained that 2019's weak performance led to temporary shutdowns. "Out of 216 million tons of capacity, more than 10% was shut down simply due to the poor market conditions in 2019." As a result, the pandemic hit the sector when it was already operating below capacity. "With COVID-19," he continued, "there was another reduction in capacity."