Demand in the user industries of the West like housing, autos and durables falls
Steel prices, which have softened 20-25 per cent in the last few months, may drop further by $100-150 a tonne due to falling demand for steel in the West, with no signs of recovery in user industries like housing, autos and durables.
Prices of hot-rolled coils, an intermediate flat steel product, have fallen on an average from $1150 a tonne at its peak to $900 a tonne. Prices of long products used in construction have fallen more sharply from $1400 a tonne to $900 a tonne, with prices falling more sharply in some markets like West Asia.
Steel producers are trying to increase prices by undertaking production cuts. Industry leader Arcelor Mittal is preparing to cut production by 15 per cent.
Even then, analysts feel prices will not rise in October. Here are two scenarios.
“If demand weakens further, prices will keep falling till it reaches $750 a tonne, where it meets its first resistance (below this, some firms will make losses),’’ said AS Firoz, an industry consultant and former researcher at the ministry of steel.
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A worst-case scenario will be if prices fall below $600-650 a tonne (marginal cost level) when many steel makers will start making cash losses. But some like Tata Steel (domestic ops) are so low-cost that it makes money even at $450 a tonne.
The optimistic view is that if the production cuts are strong and there’s revival in demand, steel prices could settle at $800-850 a tonne, rise a bit, and then stay flat. Prices go up in winter when there’s lesser movement as ports get clogged.
“I don’t think there are chances of an economic revival in the West anytime soon. With the financial turmoil, the overall sentiment is only going to get worse,’’ said a senior executive with a steel company, who didn’t wish to be identified.
Chinese steel consumption, a key driver in this up-cycle, is coming down as its export-oriented manufacturing slows down in tandem with the global slowdown.
Chinese steel-makers are facing a cash crunch as China curbs credit to curb inflation at home. This is forcing them to slowdown investment and growth. The credit crunch is also hurting infrastructure and real estate projects at home.
So, is the steel cycle turning? “It’s too early to say that; it’s only three months (since prices have started softening). We are in super-cycle. There’s no way (we can say that the cycle is turning). It’s difficult to predict,’’ said Feroz.
Though prices of iron ore, a key input in steel-making, has come down sharply from $148 a tonne to below $100 a tonne, global steel majors may not benefit immediately as they are locked into long-term supply contracts for iron ore.
Indian steel-makers are exposed on coking coal, another key input for steel-making, where they need to import two-thirds of their requirement of 25 million tonnes. Coking coal prices remain high though they are likely to correct.
In the last down-cycle, the prices of HR coils had touched a low of $145 a tonne in December 2002. While no one expects steel prices to crash to that level, the prices could come down $100-150 a tonne in the next three months, rise on strong production cuts, and could remain flat in the long-term.
To compound problems for domestic steel makers, buyers are deferring their purchases as they expect steel prices to come down, JSW CEO Sajjan Jindal said in a recent interview to a news agency.
If steel prices come down sharply, it will hurt the cash flows of Indian steel majors and could force them to review or slow down their expansion, which are already feeling the heat of rising interest costs and liquidity crunch. This has reduced the fund-raising options, which could hamper the financial closure of new projects.
WHY PRODuctioN CUTS WILL BE EASIER: Production cuts, which used to be difficult earlier as technology didn’t provide the flexibility to stop and restart production quickly—has become easier. Today, it’s much easier to close and restart the production process. Besides, steel-makers can afford to run their plants at reduced capacity (80-85 per cent) profitably.
Earlier, they used to shudder at the thought of running their plants at 90 per cent capacity. Today, they have much more flexibility to adjust production—European steel-makers can quickly go for production cuts. No wonder, Arcelor Mittal wants to take a lead. Besides, the consolidation in the industry will aid production cuts.
“Today, the steel industry is cartelised; Arcelor Mittal alone controls 110 million tonnes of production. The top five players can play a role in a strategic decision related to prices,’’ said an expert. But they can’t do anything to boost demand as steel demand is price-inelastic; you cannot boost demand by reducing prices.
Earlier, in a down-cycle, steel-makers would compete among themselves, and the prices used to tumble. Many steel-makers used to resort to price cuts to retain market because they knew if they made losses, they would be bailed out by the banking system; known as the banking syndrome in steel industry. In a market economy, experts feel there’s unlikely to be such rescue acts.