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Steel demand in the Association of Southeast Asian Nations, or ASEAN, faces an uphill task to return to pre-pandemic levels amid concerns of runaway inflation and geopolitical tensions.

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Market uncertainty was evident amid an ongoing war in Ukraine and growing inflation, while construction activity resumes from pandemic delays amid a sluggish automotive sector. Global inflation has emerged as a hinderance to ASEAN's economic recovery in 2022 and thereafter.

The inflation rate for emerging and developing economies rose to 9.37% over January 2022 to April 2022, against 4.23% the year before, data from the World Bank's June Global Economic Prospects report showed.

"The average inflation rate in ASEAN countries increased from 0.9% in January 2021 to 3.1% in December 2021 and then to 4.7% in April 2022," Sithanonxay Suvannaphakdy, a lead researcher at ISEAS–Yusof Ishak Institute, formerly the Institute of Southeast Asian Studies, had said.

Southeast Asia Iron and Steel Institute, or SEAISI, had cautioned that ASEAN steel industry players would have to search for alternative supplies of semi-finished steel products and coking coal as imports from Russia and Ukraine are curtailed due to the war between the two countries.

"Russia and Ukraine account for a small share -- under 3% -- of global exports. However, many global industries rely on supplies of key commodities produced in the two countries, especially in Russia," the World Bank said.

Market sources told S&P Global Commodity Insights they had doubts that demand in ASEAN could return to pre-pandemic levels as early as 2023.

For 2022, the Worldsteel Association projected ASEAN's demand at 76.1 million mt, up 4.8% from 72.6 million mt in 2021. However, the projected demand for 2022 is still lower than the 80.3 million mt posted in 2019 prior to the pandemic.

Based on the association's forecasts, ASEAN steel demand is expected to return to pre-pandemic levels in 2023, when demand is projected to reach 80.8 million mt.

Nevertheless, the "forecasts for 2022 and 2023 are subject to certain scenarios and carry downside risks," Nae Hee Han, Worldsteel Association's director of economic studies said at an ASEAN steel demand forecast event organized by SEAISI.

S&P Global estimated that 50 million mt/year of capacity is likely to develop in Southeast Asia over a decade rather than a period of five or six years. While the estimate looks to be conservative, it would be no surprise if the eventual new capacity total is lower than 50 million mt/year, it said.

In Indonesia, local steel demand is forecast at 16.3 million mt in 2022, up 5% year on year and rising to 17.3 million mt in 2023, the Indonesian Iron and Steel Industry Association projected, supported by a growth forecast of 4.9% for the local construction sector.

Support for Indonesian steel demand is also expected to come from the local automotive industry, which is expected to produce 1.19 million vehicles in 2022, up from 1.12 million vehicles in 2021, but below the 1.29 million vehicles produced in 2019.

"What we can see is definitely an economic slowdown. Maybe the prediction on Indonesia's demand is based on (the) new capital city project in Kalimantan, which plans to start this year," an Indonesia-based end-user said.

Indonesia faces a huge jump in steel demand as the country plans to relocate its capital from Jakarta to East Kalimantan in 2024 and name the new capital Nusantara.

"During 2018 to 2020, domestic steel consumption has not increased at all, every year the government says 'increasing' or 'growing up', but it's actually not happened," an Indonesia-based trader said.

According to the trader, steel consumption in Indonesia was unchanged at about 15 million mt over 2018-2020. The Indonesian Iron and Steel Industry Association data showed demand for 2018 at 15.1 million mt, 15.9 million mt for 2019 and 15.1 million mt for 2020.

In Vietnam, tight credit and delayed infrastructure and construction projects have seen weak end-user steel demand. Buyers also kept away as import prices fell steadily. Platts assessed SAE1006 hot-rolled coil at $667/mt CFR Southeast Asia June 30, down 12.8% from $765/mt on June 1, data by S&P Global showed; sharply lower from the 2022 high of $925/mt on March 7.

Local Vietnamese producer Formosa Ha Tinh Steel, also saw a significant decline in booking orders for their latest August shipment, exacerbating expectations of production cuts in the upcoming weeks.

Vietnam, along with Indonesia and Malaysia, has kept inflation under control but inflation pressure is weighing on the Philippines, Singapore and Thailand.

Vietnam's immediate neighbor, Thailand, saw its inflation rate hit 7.1% in May, its highest in 14 years, data from the Trade Policy and Strategy Office showed, up from 4.7% in April. The Thai National Economic and Social Development Council had projected inflation at 4.7% in 2022 and between 4.2% and 5.2% in 2023.

"Despite the negative shock to global activity in 2022, there is essentially no rebound projected next year; global growth is forecast to edge up only slightly to a still-subdued 3% in 2023, as many headwinds -- in particular, high commodity prices and continued monetary tightening -- are expected to persist," the World Bank said.

"Elevated levels of inflation, combined with sharply slowing growth, raise concerns that the global economy is entering a period of stagflation reminiscent of the 1970s."

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