The nearly 23 per cent fall in world steel production to 264 million tonnes in the first quarter of 2009 over the same period last year is to be taken as a statement of the continuing difficult times for the manufacturing and construction sectors. The setback in steel production in North America was 52.1 per cent to 16.6 million tonnes and in European Union 43.8 per cent to 30 million tonnes.
Thanks to China, where production rose 1.4 per cent, the fall in Asian steel output was comparatively modest at 8.9 per cent to 173 million tonnes. The major setback in world steel production in the first quarter is, however, not surprising as distributors and actual users around the world continues to draw heavily from inventories built earlier. Buying is restricted to the bare minimum.
Subdued economic activity in spite of the country specific and G20 stimulus packages has meant that steelmakers around the world are seeing demand for shipments being almost halved compared with a year ago. Not surprisingly, therefore, steel prices fell by nearly 50 per cent since July.
A Credit Suisse analyst says that the steel industry has seen the “bottom of the trough” in the first quarter. ArcelorMittal, which has nearly 10 per cent share of the global steel production, is also seeing potential for price improvements in the current and third quarter across major markets and products.
For the first time in nine months, Indian steel makers could post some rises in long products pries. This would not have come about unless there are some stirrings in construction activity. The world steel industry is now drawing some comfort from the beginning of a turnaround of the Chinese manufacturing sector.
Some price revisions here and there are not the same as feeling a bounce in demand. It remains a subject of speculation as to when that bounce will actually be felt. The negotiation of demand recession has required of the world steel industry to resort to some drastic cut in production making thousands of workers idle.
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Unlike ever in the past, the steel industry has given a demonstration of discipline by mothballing capacity in steps with falling demand for the metal. Lakshmi Mittal, who has created history by championing the cause of capacity consolidation in a highly fragmented industry, was not found shy of cutting production in “recent months by nearly 50 per cent.”
As he found many converts to his capacity consolidation mantra, in shaving production too, steelmakers followed Mittal. Had not there been a few large steel groups – incidentally, ArcelorMittal is three times bigger than the world’s second largest producer Nippon Steel – created by way of capacity bunching and the Chinese industry not presenting a united front when confronted with major issues, steelmakers would have fared much worse in the present crisis.
Such deep is the bite of demand recession that collapse in metal prices is unavoidable. But at least the world has not seen this time the spectacle of steelmakers unloading stocks by undercutting each other. Capacity consolidation has lent some discipline to the market and also improved the bargaining power of steelmakers with producers of iron ore and coking coal.
No one at this point can say with any amount of certainty as to when the steel industry will be back to “normal working.” Switzerland based world’s biggest steel trader Duferco says that the current year will not see “recovery in steel.” Going further, it maintains that the industry will have to contend with a 15 per cent year-on-year demand fall in 2009.
Duferco chairman Bruno Bolfo maintains that the steel industry will feel the impact of capacity overhang for at least another five years. In that event, all the big investment proposals relating to building of steel plants in India and elsewhere will stay in back burner.
SAIL chairman Sushil Roongta is in the minority of one to have put faith in brownfield capacity expansion even before the collapse of the steel market. If one is looking at big ticket investments in greenfield mills like that of ArcelorMittal, Posco Tata Steel (it has made some progress in Orissa braving unjustified local opposition) and JSW, then one will be drawing a blank.
But why should we be thinking of new steel projects at this point when speculation is rife that ArcelorMittal will either sell some of its high cost mills or make permanent cuts in capacity.
The company says all production cuts are temporary and “we have no current plans to permanently” get rid of any capacity. But then how will the company justify to the stakeholders of doing with mills which the current market has made highly unprofitable?