Task ahead in steel

In keeping with the optimism that Indian business has been showing, steel stocks marked sharp gains on Friday even as the country's largest steel producer, SAIL, reported a drastic 55 per cent drop in earnings. SAIL was not out of line; earlier Tata Steel had reported a 15 per cent drop in its bottom line. The immediate optimism and the market upsurge resulted from the dramatic bid that Mittal Steel, the world's largest steel producer, made for Arcelor, the second-largest. The bid is part of Mittal Steel's attempt to lead the consolidation of the global steel industry in order to get it away from being a permanent victim of the boom and bust cycles that affect commodities. The global steel industry has indeed consolidated in recent years, to its great advantage. Last year, for the first time, it was able to cut production and thereby shore up prices. But as Mittal Steel itself has pointed out, the consolidation has till now helped to restructure the US and European steel industries. It must spread to China, where the industry is fragmented. The Chinese authorities have acknowledged the need for this, but the process will take time.

This is the reason why the market should not lose its head over the short-term prospects for Indian steel makers. Like everybody else, they remain deeply vulnerable to China's impact on global steel demand. And the bad news is right there, because last year may have marked the tipping point in China's trade status in steel. From having been a major net importer of steel for years, China became a net exporter in the first half of 2005, and in the first 11 months of the year it imported a mere 300,000 tonnes more than the 25.1 million tonnes it exported. There is now the widespread expectation that the current year will see China become a steady net exporter of steel, since its Olympics-driven construction appetite has been sated. Steel prices can only head south as consolidation in the Chinese steel industry takes time to impact. The downturn in Indian steel leaders' results, after a period of super profits, is a result of global prices softening in response to the tapering off of Chinese demand.

A downturn in steel prices, which seems inevitable now, need not however be all bad news for Indian steel. The industry is still plagued by high raw material costs, and if Indian manufacturers succeed in integrating backward (the tussle over iron ore mining rights is a reflection of this), then it will have an edge over a lot of the global competition. But more important, large Indian steel makers have miles to go before they can claim to be among the most cost-efficient. Right now, only Tata Steel makes it to the global league table of the 12 most efficient steel producers, though many other producers are now conscious of the need to be globally bench-marked. India also has the management expertise to bring about change""it is managers from India who have helped Mittal Steel turn around one acquired steel plant after another, around the world. So it is within the Indian industry's powers to beat the downturn that lies ahead""by becoming a truly competitive global player.