Saturday, March 15, 2025 | 10:23 PM ISTहिंदी में पढें
Business Standard
Notification Icon
userprofile IconSearch

High raw material prices squeeze steelmakers' margins globally

Image

Kunal Bose

Winter is still a few months away, but the steel industry, particularly in the US and EU, has already started feeling the chill. In the face of falling demand from automobile and consumer durables makers, spot prices of hot- and cold-rolled products have slipped quite a bit in the US in the past few weeks. The news about sovereign debt, falling growth in major economies and a liquidity crunch have made steel brokers and traders in the US nervous. They are liquidating long positions and selling hot- and cold-rolled products at growing discounts to mainstream prices. The EU steel market scene will soon become clear, as member-countries are ending their summer holiday. With India allowing steel imports at five per cent duty, it cannot be ruled out that the market here would catch cold when major consumption centres like the US and EU are sneezing. We have earlier seen how the entire world got enveloped when the US was hit by a financial crisis in 2008.

 

No one will be fooled into believing that steel prices in Europe will not come under the same pressure as in the US, when France has not grown at all in the second quarter, the UK is expecting a further reduced growth of only 1.5 per cent while the country’s jobless rate is now up to a worrying level of 7.9 per cent and Italy is forced to go for $63-billion budget cuts over the next two years. The question doing the rounds is why traders in the US are in a hurry to liquidate stocks when the chairman of US Steel, the country’s largest fully integrated producer, says: “Our view is that the underlying demand for what we’re making and selling is okay— not explosive growth, necessarily, but okay.” The trade sees this as a weak statement in a situation when no one is a buyer at mainstream prices. The market confidence not been boosted by the public stand of major US steel makers that they are to go ahead and raise the prices of flat products, irrespective of what happens in the spot market.

Steelmakers everywhere are finding their margins squeezed — the Chinese are most vocal about it — by prices of raw materials like iron ore (around $177 a tonne) and coking coal (around $320 a tonne) remaining high, while there is market resistance to upward revision in metal prices.

Here, in our country, prices of leading steel stocks like Tata Steel, SAIL and JSW have come in for hammering as the near-term outlook for the metal is not confidence-inspiring. ArcelorMittal, which last year produced 90.6 million tonnes of steel, is trading at close to its 52-week low of $19.56, a sharp fall from the high of $38.60 a year ago. In a secular fashion, other leading groups from US Steel to Nippon Steel and Posco have seen a very substantial erosion in their market capitalisation. It will appear somewhat strange that while shares of resources and steel companies continue to take a beating, iron ore at current rates is nearly 30 per cent up, compared to a year ago. Even after the recent correction, Brent crude is trading at a 40 per cent premium over January rates.

Are we to see, at some stage, a replay of the 2008 sequence of events of commodity prices collapsing a few months after shares of commodity-owning groups and steel and aluminium producers take a knock? No doubt, talks of the possibility of a double-dip recession have done considerable damage to the equity market and steel prices.

The point, however, is that, unlike in 2008, governments are now showing readiness to step in at the slightest hint of the economy spinning out of control. Similarly, major banks, after suffering the humiliation of being rescued by governments, are now a lot more circumspect in lending. But one will also read in this circumspection the reason why steel traders in the US are under pressure to cut inventories. Earlier, they had borrowed from banks against steel stocks. But since the banks, in view of falling steel demand and prices, do not want their funds tied up in steel inventories, traders are left with no option but to liquidate stocks for cash. Meanwhile, those who are cutting their long positions at losses, no doubt, swear by the age-old principle that the “first loss” in a falling market is the “least painful loss”.

According to Metal Bulletin, the current moves of brokers and traders are in response to “a total lack of confidence, or even a fear of remaining exposed”, with stocks bought earlier either at prices higher than current market or long positions. It further says the fight by banks to honour lending restrictions is leading to drying up of credit. As a result, brokers and traders are denied “room to manoeuvre”. Finally, most of them have been wise enough to take the loss now than seeing their miseries rise in a falling market. The US has after all seen hot-rolled coils being sold at close to $600 a tonne, compared with $900 a tonne seen earlier in the year.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Aug 30 2011 | 12:50 AM IST

Explore News