It is in itself some achievement that the country’s steelmakers are able to engage their customers in discussions about price revisions of products for long-term contracts in the present difficult circumstances. This is because the initiative stands in rather sharp contrast to the scene in the northern hemisphere and China. In both regions, steelmakers are doing a few things to regulate production in anticipation of further fall in prices and their margins coming under increasing pressure. In spite of Western countries returning to work after a traditional holiday break for a month, global production in September, according to the World Steel Association (WSA), fell by 674,000 tonnes to 123.57 million tonnes (mt) over the previous month. This is the lowest since February, when world output was 118.36 mt.
What is a pointer to further disturbances in store is Chinese production contracting 3.5 per cent in September to 56.7 mt, the lowest in seven months. Incidentally, September marks the beginning of the peak steel consumption period in China. The Chinese economy grew 9.1 per cent in the third quarter of 2011, nothing exceptional for the Middle Kingdom but absolutely exceptional by any other parameter. But this growth rate could not stop Chinese steel prices slumping to their lowest in 10 months. As demand remains weak, hot-rolled (HR) coils are selling at $648 a tonne (4,123 yuan) and rebar finding application in construction at $675 a tonne. These prices may be at 10-month lows, but even then, Chinese steelmakers have braced themselves for further price fall.
The benchmark product HR coils are selling in the US and European markets at a discount of anything up to $250 over the April peak rates of $900 a tonne. Observers will not rule out HR coils seeking still lower levels because of the domino effect of European Union’s sovereign debt crisis, pursuit of tight monetary policy by major economies like China and India at the cost of growth and a global steel supply glut. What do we get to see in the West? In a falling market, steel buyers at the distribution sector, as is to be expected of them, are keeping their inventories low. Many are pressured by their banks to return the loan money. Steel no longer finds favour with banks. At the same time, US producers who till recently were not inclined to cut production and instead marked up spot prices of HR coils by $60 a tonne in August, are now inclined to sell the metal at discounted rates. They do not want to be left with bloated inventories. In the present market for steel and steel-making raw materials, announcing another price rise by some mid-sized US mills is nothing but a show of bravado. How could anyone in this environment see signs of demand improving for hedges to be sought?
Here in our country, demand in the first half of 2011-12 grew disappointingly at 1.8 per cent on a year-on-year basis. This falls considerably short of WSA forecast of Indian steel use rising 4.3 per cent this calendar year to 67.7 mt. In the first nine months to September, India’s crude steel production was nearly 54 mt, signifying an easy supply situation. Steel secretary Pradeep Kumar Misra says by 2013-14, the country would have added 45 to 47 mt of new capacity. Misra and SAIL chairman Chandra Sekhar Verma attribute the tepid demand growth till September to seasonal factors and they think this will get corrected as we go forward. Not everyone is, however, a taker of their optimism of a 9 to 10 per cent demand growth happening this season. After all, the industrial growth rate between April and August was 5.6 per cent, against 8.7 per cent in the corresponding period of 2010-11. Perhaps the steel demand scene will get better once the 12th plan, providing an investment of $1 trillion in infrastructure development is launched next year.
As the world, and Asia in particular, is deluged by steel, we are seeing reports of disappointing earnings by companies in Japan, South Korea and India.
Dispirited by the economic outlook, a spokesperson for Posco says prices are likely to fall till the first half of next year. He is viewing the company’s fourth quarter earnings to be the “worst this year.” Meantime, slowing demand growth in the face of oversupply has led both Nippon Steel and rival JFE to downgrade their full-year outlook. The world’s biggest steelmaker, ArcelorMittal, is trying to make the best of a bad situation by switching off blast furnaces (BFs) at several centres in Europe while trying to lift production at its low cost plants. Other mills, including many in China are advancing maintenance schedules to keep production down for the time being. Some are postponing the relighting of BFs, though repair work is complete. The situation has come to such a pass that falling prices of raw materials are not leading to any improvement in steel profit margins. Because it will be some time before steel has found its bottom.