Metals and minerals without exception have been on a roller coaster ride since the beginning of 2008 with prices in many cases first rising to record levels only to fall rapidly, subsequently causing widespread distress.The swing in fortunes of commodities is a fallout of a big ticket financial crisis hitting the real economy.
SAIL chairman Sushil Roongta points out that the behaviour of production and prices of steel and the minerals used in its making is a good illustration of quick response of commodities to changes in the economic environment. Haven’t we seen record prices of steel, iron ore and coking coal in the first half of 2008 and then the market collapsing suddenly in response to demand shrinkage from all user segments?
World steel had its toughest time in the first two quarters of 2009 as over 20 per cent fall in production would confirm. But what continues to haunt steel makers, especially in developed countries is the World Steel Association (WSA) forecast that steel use would contract by 13 per cent this year to 1,040.1 million tonnes. Last year too demand fell 1.7 per cent to 1,196.2 million tonnes. All this not withstanding, Roongta has started noticing green shoots as for the first time in July world steel production was in excess of 100 million tonnes. All green shoots don’t, however, prosper. Having seen the recent volatility in steel prices and production, Roongta is not as yet ready to come to the conclusion that globally the metal is finally on a recovery path. In any case, the July production highlight was China alone making over 50 million tonnes.
The steel industry in China and India has weathered the storm better than in the rest of the world. The metal, Roongta suggests, is an example of China and India being “decoupled” from the developed world both in terms of output and consumption growth rate. How could it be otherwise when infrastructure development, construction and manufacturing industries are given the thrust of Chinese and Indian kind!
Last financial year was, however, somewhat exceptional when due to a demand wrenching second half, the Indian steel use contracted 1.2 per cent. In any case, the “decoupled” India has approved as many as 37 infrastructure projects claiming investment of over Rs 70,000 crore in the six months to January 2009 and some more mega projects are awaiting clearances. This and also the fact that the automobile industry is vrooming once again, make Roongta believe that Indian steel use could rise 7 per cent this year.
Roongta no doubt is projecting a much better steel demand growth for the country than WSA. Let this be recalled that prior to 2008-09, there were occasions when steel consumption here grew at an annual rate of 11 to 13 per cent. At this stage of our economic development – the same can also be said about China – steel consumption growth will necessarily be ahead of GDP’s progress.
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At a per capita steel consumption of 44.3 kg, we have miles to go before we could catch up with world average of over 150 kg not to speak of China’s more than 400 kg. This will explain why steel minister Virbhadra Singh wants productive dialogue with mineral owning states and central ministries concerned with giving clearances for opening new iron ore mines. After all fresh investment in steel will be largely influenced by promoters getting mines linkages.
Singh’s initiative comes at a time when the demand for steel and, therefore, its prices have started looking up. User industries are to start restocking steel since the bet could no longer be on price falls. In fact, in recent weeks steel makers could raise the prices of flat products. And it should not be long before they could post higher prices for long steel on the back of better demand materialising from infrastructure and construction sectors.
In any case, Roongta leading the country’s largest steel producing groups finds returns at $600 a tonne of HR coil, ex-mill, “quite reasonable.” World economic meltdown has seen to it that iron ore and coking coal costs are now much lower than a year ago. Moreover, belt tightening in difficult times has brought about some significant improvements in Indian steel industry’s techno-economic parameters.
Cutting corners saved Rs 850 crore for SAIL last year. But it is still a voyage of discovery for Roongta who wants to make incremental savings of Rs 1,000 crore during 2009-10. Now, however, is not the time for self-congratulation, for there are steel makers abroad with techno-economic parameters far superior to ours. Whether it’s the chairman of Tata Steel or SAIL, he will have to rest his credibility on maximum cost cutting.