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Introduction
You know the scene. It opens every middle school video on almost any material. A happy, smiling, foursquare family sits obliviously around the kitchen table enjoying breakfast or dinner. The announcer encourages us to imagine a world without the subject material… Then, in a flash, the material is removed from the scene and the family members all find themselves sitting on the floor, dazed and glum, with no utensils, no stove, no fridge, no pans, no light cord. They want their steel back.
It’s a hackneyed snapshot of the value of steel to the nuclear consumer family, and it’s true. But steel is more important than that. Steel is the second most voluminously produced commodity after oil, and that production is rising: In 2018 the world consumed some 1.6 billion metric tons, more than twice global consumption in the year 2000. Recent demand has been powered by the rapid expansion of China’s economy, which is no surprise considering steel has been one of the foundation materials in the building of every industrial society. It was a product of the British Industrial Revolution in the late 18th century and has powered the industrialization of every country since. Not only is contemporary life dependent on high-quality steel products, the entire configuration of an industrialized economy and its future product and infrastructure developments rely on it. Here we’ll discuss four factors that make the steel industry tick.
People
The most basic factor. As the population grows, demand for steel, along with many other things, increases. This scarcely warrants being said, but while it’s a simple observation, the underlying connection is more subtle. Global population growth is essentially driven by two factors, fertility and mortality. In other words the number of births per woman and the number of deaths. In 19th-century Europe, medical advances—in particular vaccinations, epidemic control, insights into the value of basic hygiene, and urban water and sewer systems—improved mortality rates and life expectancy. Death rates fell but birth rates continued at the same rate, leading to a population explosion. In time however, along with contraception and higher expectations of child survival rates, the birth rate in some economies dropped below replacement rates.
At the same time, science was also having an impact on industry. The population explosion in Western Europe and North America drove those societies to invent new ways of making old materials, and to discover new applications for those materials in transportation and infrastructure. For a time, steel demand and population growth went hand in hand, but that correlation weakened in the 1970s and 80s when populations grew but steel production stagnated.
Wealth
What happened in the 70s and 80s? The medical, epidemic, infrastructure, and hygiene lessons of earlier years contributed to population growth in Asia, but that growth wasn’t necessarily accompanied by an increase in economic wealth. The arc of economic wealth development is a more powerful driver and predictor of steel consumption than pure population growth alone.
The chart below shows the relationship between a country’s wealth (measured by GDP/capita) and its demand for steel (measured by Kg/capita of steel consumption). Each data point in the chart represents one year for the U.S. economy between 1900 and 2018. The general shape of the curve underlying the dots is typical and would look similar for most industrialized countries.
In the initial stages of economic development, economies grow and industrialize rapidly, leading to a sharp increase in steel consumption/capita. That increase is driven primarily by infrastructure and capital spending required to support urbanization and population growth. But as economies become “developed,” the need for additional infrastructure slows and the demand for steel stops growing, and eventually it declines.
This phenomenon not only applies to steel. The characteristic parabolic curve can be drawn for almost any industrial commodity: Usage grows rapidly in the initial phases of industrialization, then declines as an economy switches increasingly to producing and consuming services, leading to a decline in the manufacturing sector’s share of GDP.
Sector Activity
As economies develop and move through the GDP and steel intensity curve, not only does steel demand and production change, so does the way those societies use it. In the early stages of economic development, the primary focus of economic activity is building infrastructure and investing in fixed assets. The type of steel used to build highways, bridges, power grids, and apartment buildings is what the industry refers to as “structural products.” (Think such “long products” as concrete reinforcing bars or structural beams, but also steel plates for ships and bridges.) In the later stages of development, when demand shifts from investment to consumption, economies produce more consumer products such as cars and household appliances. The steel used in the manufacture of these products is referred to as “flat products,” such as the hood of a car or the side panel of a refrigerator.
We can see this shift when we compare two countries at different stages of economic development. The chart on the left below shows China’s production of steel in 2018, 59% of which is long products. On the right is South Korea, where 70% of steel production comprises flat products. Note South Korea’s strong shift to flat products happened around 1991, a shift China is just beginning to make.
While this general rule applies, there can be significant differences among countries as a result of how their economies develop. Countries that focus on exporting manufactured goods (Japan and Korea) consume more steel in the early stages of development, have higher levels of peak demand, and use a higher proportion of flat products throughout their economic development. Small countries with significant exports of raw materials such as oil also consume more steel per capita than similarly sized economies that focus more on tourism.
Innovation and Material Use
Steel use is also subject to the influences of material innovation, construction trends, and societal preferences. Steel engages in constant competition with competing materials such as aluminum, concrete, plastics, and wood. Because steel producers have found ways to make stronger and lighter products, the industry has won a few battles, such as replacing wood in framing applications, providing an alternative to asphalt shingles in residential and light commercial roofing, or becoming the preferred material for garage door panels. But because other material industries also innovate, steel has also lost share in some key markets. Most beverage cans in the U.S., for instance, are made of aluminum.
The automotive industry is one of the more interesting case studies. Societal preference for fewer carbon emissions have pressured car makers to produce lighter, more fuel-efficient vehicles. This created an opportunity for aluminum, which is lighter than steel, to take market share in automotive body panels. Steel producers have responded by producing stronger products that balance the demand for light-weight materials with the desire for safety. Of course, the mix of vehicles produced also has an impact on weight and fuel efficiency. In the U.S., for instance, truck production has outpaced car production for a generation, and trucks now account for 75% of all light vehicles produced.
So what makes the steel industry tick today?
Short answer, the same drivers that moved the industry in the past. Short-term steel consumption is difficult to predict with certainty because steel is prone to cycles governed by a number of outside factors. But long-term demand trends, powered by the four factors listed here—population, wealth, end-use sector activity, and material innovations—are clearer.
Population globally continues to grow and is expected to peak later this century. Population models vary widely according to assumptions regarding future birth and mortality rates, but in almost any scenario the world will need to add at least another one billion metric tons of steel each year to the current annual consumption rate (around 1.5 billion metric tons).
Most of the growth will come from demand in Asia (India in particular) and Africa (Nigeria leading the way?). This will contrast with continued erosion of demand in the developed economies of Europe, North America, and Japan. Their populations will stabilize and even decline, consumer preferences in personal mobility and durable goods will change, and developments in energy sources, generation, and consumption will move away from carbon sources. Just exactly how those new metric tons will be made, however, remains to be seen.
The things that make the steel industry tick on the demand side have corresponding drivers on the supply side. Innovations in low-carbon and even carbon-free steel production will support global population growth and the accompanying demand for new materials, while not overwhelming the planet’s ecosystem in the process.