The proof that the world has more steel capacity than demand is in many mills idling large capacity. Production in the developed world is yet to be back to the pre-crisis level. World capacity use has remained a tad higher than 80 per cent, mainly due to good show in Asia and the West Asia. The industry has made much progress over the corresponding time of 2009 when governments around the world in their battle against a crippling recession put in place massive fiscal stimulus programmes.
ArcelorMittal, which bucked the trend of other global steel producers by posting an impressive second quarter profit of $1.7 billion had to rest three blast furnaces in Europe and the US each in a response to market compulsions.
But the company is now restarting an idle blast furnace in the US where it claims to be faring better than in a more lethargic Europe. But ArcelorMittal is an exception than representative of the rule for the US steel industry facing the prospect of slipping demand and rising inventories. Incidentally, US Steel Corporation, the country’s largest steelmaker, made a loss in the second quarter for the sixth time in a row.
ArcelorMittal whose production of 77.5 million tonnes last year was more than 15 million tonnes ahead of the combined output of its nearest rivals Bao and Posco is likely to use about 70 per cent capacity in the current quarter, a sharp 8 percentage point minus from the second quarter. The world’s biggest steel producer is no doubt showing restraint in using capacity. But at the same time, any number of mills are raring to use greater capacity at the slightest hint of market recovery. In fact, besides solid economic reasons like slowdown in China and demand turning soft in Europe, what has caused bearishness in steel prices is supply staying ahead of demand.
No surprise, therefore, ArcelorMittal is bracing itself for a quarter-on-quarter fall in profits in three months to September end. At the same time, however, chairman Lakshmi Mittal told the Wall Street Journal that he would seek a 10 per cent increase for its steel prices to preserve profits. He is putting a team together to go out and talk to the company’s more important buyers why a price increase is sought. ArcelorMittal claims to have been able in some cases to load the higher production cost on raw materials account on steel as it renegotiated automotive contracts recently. But whether the luck will continue to stay with the firm as it continues to ask buyers to relook at steel making costs remains a question.
No doubt the steel industry is stayed put in a catch-22 situation where it sees inflation in raw materials cost but is not able to pass on the incremental burden to metal buyers. What has come down heavily on steelmakers is the new system of pricing iron ore quarterly, allowing the miners to benefit quickly from any price surges in the spot section compared with earlier contracts signed on an annual basis. The doing away with the four-decade old annual benchmark price regime overcoming strong resistance from Chinese and Japanese steelmakers has helped Brazilian Vale, the world’s biggest producer and exporter of iron ore to lift its profits four-fold in the last quarter.
ArcelorMittal must not be suffering from any illusion that however much it wants better prices for steel, the market sentiment is not going to be supportive of its campaign. It still remains a subject of speculation whether China is to relax growth curbing measures anytime soon. As for the US, the recovery lost momentum in the June quarter leading one to wonder if the economy is on the cusp of a protracted stagnation. A Thomson Reuters/University of Michigan survey says American consumer confidence was down to a nine-month low in July.
Paul Mortimer-Lee, chief global economist of BNP Paribas says “concerns about a double dip recession will not go away.” However, Mittal is not foreseeing anything more than “some blips in the overall trajectory of the world economy.” Caparo chairman Lord Swaraj Paul says nobody at this point will give a clean bill of health to the world’s major economies which are on a recovery struggle from the deepest recession since the Great Depression. Lord Paul’s uneasiness about the state of the economy is because the fear of a double deep recession remains much in the air as consumer confidence in many countries in the West is coming close to credit crisis levels.
In any case when it comes to economic forecasting there cannot be any Oracle of Delphi. As for steel, Lord Paul citing the example of Caparo’s buying of the metal in the US and Europe says, “When so much capacity is idle, steelmakers will have to live with a buyer’s market. Nobody wants to switch off a blast furnace. So you always find rivals in the steel industry betraying desperation to get business.” Not many experts are, therefore, hopeful of any strong steel price revival in the remaining two quarters of 2010.
