Deceleration in China's economic growth as President Xi Jinping shifts focus from investment to consumption-led growth to avoid any hard landing for the world's second largest economy has meant the cycle of capacity, production and demand for the world steel industry has come to an end.
This was unavoidable since China, for nearly two decades, grew steel capacity at such a frenetic pace that it has nearly half the share of global production. The profile of the world steel industry has become such that if China sneezes, producers in other regions will invariably catch cold. A lethal combination of overcapacity and demand fall, both mostly occurring in China, has been largely responsible for a 40 per cent fall in steel prices this year. Margins remain under pressure despite big falls in prices of iron ore and metallurgical coal, its two most important ingredients. Investors have lost interest in shares of producing companies.
ArcelorMittal is down half from its 52-week high of $13.315. Here, Tata Steel shares have suffered value erosion of the same order. This is in spite of 2.9 million tonnes (mt) new capacity at its Jamshedpur plant being fully ramped up, continuous product mix enrichment and the steel ministry's Joint Plant Committee reporting the country's demand in the first half of 2015-16 growing 4.1 per cent to 39.14 mt on a year-on-year basis.
India, according to WSA, is one of the few countries to remain a "resilient" economy in the face of a "global slowdown" because of its commitment to "reforms". Indian steel demand in 2015 is to rise to 81.5 mt from 75.9 mt in 2014. WSA says its use will further improve by 7.6 per cent to 87.6 mt next year. Hopefully, the three-year high of 6.4 per cent rise in industrial growth in August, supported by good showing in manufacturing, mining and electricity, will be sustained to generate good demand for steel in the months ahead.
There is a damper, however, in the form of India's exports shrinking for 10 straight months by September. Engineering goods shipments contracted 22.8 per cent reflecting the strained global demand. For the same reason, Chinese exports fell 3.7 per cent in September compared with a year earlier. A major point of concern for the industry here is that large volumes of the new steel capacity are getting commissioned when producers are not able to earn any surplus by selling items at current prices. In India's previous round of major capacity expansion after the government threw open the sector to the private sector, Ispat Industries, since taken over by JSW Steel in a rescue operation, and some others found themselves on the mat by a bad market. That is not a forgotten experience. Bank loans to steel groups becoming non-performing assets will be unavoidable if prices do not improve. For that, the economy needs robust public spending, clearances of infrastructure and other big projects, and moderation in steel imports.
A WSA official says the world steel industry's low growth will last till "other regions of sufficient size and strength" deliver "another major growth cycle". Such hopes largely rest on India. Hasn't Prime Minister Narendra Modi given a call to grow India in the next two decades at a pace that matches China's in its best days? As has been the Chinese experience, steel demand growth here will remain strong in case the economy advances by eight to nine per cent a year.
WSA says China's steel demand will be down 3.5 per cent to 685.9 mt this year, on the back of demand contraction of 3.3 per cent to 710.8 mt in 2014. In 2016, too, the country will suffer a demand setback of two per cent to 672.2 mt. Fall in local steel use will leave China with huge exportable surplus. That's a point of concern for India.
This was unavoidable since China, for nearly two decades, grew steel capacity at such a frenetic pace that it has nearly half the share of global production. The profile of the world steel industry has become such that if China sneezes, producers in other regions will invariably catch cold. A lethal combination of overcapacity and demand fall, both mostly occurring in China, has been largely responsible for a 40 per cent fall in steel prices this year. Margins remain under pressure despite big falls in prices of iron ore and metallurgical coal, its two most important ingredients. Investors have lost interest in shares of producing companies.
ArcelorMittal is down half from its 52-week high of $13.315. Here, Tata Steel shares have suffered value erosion of the same order. This is in spite of 2.9 million tonnes (mt) new capacity at its Jamshedpur plant being fully ramped up, continuous product mix enrichment and the steel ministry's Joint Plant Committee reporting the country's demand in the first half of 2015-16 growing 4.1 per cent to 39.14 mt on a year-on-year basis.
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Local companies have to do with low prices caused primarily by weakness in the global market and our imports rising 41.4 per cent to 5.4 mt in the first half of 2015-16, compared with the same period of 2014-15. Whatever their pains, in the World Steel Association (WSA)'s 'short range outlook for 2015 and 2016', India emerges as one of the few bright spots, where "steel demand... is expected to maintain growth momentum despite adverse external environment".
India, according to WSA, is one of the few countries to remain a "resilient" economy in the face of a "global slowdown" because of its commitment to "reforms". Indian steel demand in 2015 is to rise to 81.5 mt from 75.9 mt in 2014. WSA says its use will further improve by 7.6 per cent to 87.6 mt next year. Hopefully, the three-year high of 6.4 per cent rise in industrial growth in August, supported by good showing in manufacturing, mining and electricity, will be sustained to generate good demand for steel in the months ahead.
There is a damper, however, in the form of India's exports shrinking for 10 straight months by September. Engineering goods shipments contracted 22.8 per cent reflecting the strained global demand. For the same reason, Chinese exports fell 3.7 per cent in September compared with a year earlier. A major point of concern for the industry here is that large volumes of the new steel capacity are getting commissioned when producers are not able to earn any surplus by selling items at current prices. In India's previous round of major capacity expansion after the government threw open the sector to the private sector, Ispat Industries, since taken over by JSW Steel in a rescue operation, and some others found themselves on the mat by a bad market. That is not a forgotten experience. Bank loans to steel groups becoming non-performing assets will be unavoidable if prices do not improve. For that, the economy needs robust public spending, clearances of infrastructure and other big projects, and moderation in steel imports.
A WSA official says the world steel industry's low growth will last till "other regions of sufficient size and strength" deliver "another major growth cycle". Such hopes largely rest on India. Hasn't Prime Minister Narendra Modi given a call to grow India in the next two decades at a pace that matches China's in its best days? As has been the Chinese experience, steel demand growth here will remain strong in case the economy advances by eight to nine per cent a year.
WSA says China's steel demand will be down 3.5 per cent to 685.9 mt this year, on the back of demand contraction of 3.3 per cent to 710.8 mt in 2014. In 2016, too, the country will suffer a demand setback of two per cent to 672.2 mt. Fall in local steel use will leave China with huge exportable surplus. That's a point of concern for India.