Will India buck the trend of falling global steel prices?

Kunal Bose / Jul 03, 2012,
Business Standard
One has not ever heard Lakshmi Niwas Mittal speaking so dispiritingly about the prospects for the world steel industry, which is bearing the brunt of cost rises, capacity overhang and demand contraction leading to price falls. Not even during the 2008-09 recession, which left the steel industry, like any other metal, bedraggled. Whatever the price scene at this point here in India, local steelmakers may come to grief if they think they will stay immune to depressing developments in the rest of the world, particularly in the Euro zone. Negative signals are also emanating from China where Baosteel, the country's largest and a world leader, has announced plans to cut prices by about four per cent in July. This is seen as the fallout of Beijing's attempts at cooling the economy and ridding the real estate sector of speculative binges.

That Mittal's principal concern will be Europe where steel prices remain under pressure by oversupply at a time of major demand weakness is understandable. After all, ArcelorMittal, of which he is the chief executive officer and dominant shareholder, made just under half of its 91.9 million tonnes (mt) steel in that continent last year. Overcapacity is a burning issue in Europe where a number of blast furnaces (BF), particularly the high-cost ones, have either been shuttered or idled. Driven by the hard reality that "we can't produce what we can't sell," Mittal has rested capacity in Belgium, Spain, France and the US. Cost pressure in a situation of capacity overhang has let others, including Corus since rebranded Tata Steel Europe (TSE), to reorganise their European operations. TSE mothballed the loss-making Teesside complex in the UK in 2010 whose steel slab business was subsequently sold to Thai steelmaker SSI in February 2011, much to the relief of the local community. But parallel to capacity resting and divestment, European steelmakers are selectively putting money in more efficient mills in the hope of getting good returns in future. For example, last year TSE took up a 185-million pound plan to rebuild a BF in the UK's Port Talbot.

In the course of participating in AMM's Steel Success Strategies Conference in New York, Mittal told newsmen that European annual steel demand, which in normal times was 200 mt was now down to 150 mt underlining the need for capacity adjustments. "ArcelorMittal is looking at it. In our business, I see some overcapacity and don't expect us to produce what we can't sell," he said. But it is not Europe alone to contend with capacity remaining idle and distorting steel prices. The sovereign debt crisis in the Euro zone, a big export destination for both China and India, is hurting the global economy. Mittal confirming steel overcapacity across the globe has got much to do with the Euro zone turmoil. According to World Steel Association, capacity use in the steel industry in May was down to 79.6 per cent from 81.3 per cent the month earlier. Earlier in December 2011, capacity use was alarmingly low at 70.7 per cent. But backed by good showing, principally by automobile and energy extraction industries, the world steel industry since the beginning of 2012 could raise production and claim better prices for its products. That trend has now been reversed.

In an environment of some major cost pushes, high interest regime, rupee value fall making imports of coking coal and other raw materials that much more expensive and slow economic growth, the final quarter of 2011-12 for the Indian steel industry proved not so discouraging. The working of Tata Steel and SAIL in the final quarter of 2011-12 bears that out. That the rise in the metal demand last year trailed the country's gross domestic product (GDP) growth rate was, however, a disappointment. "I consider this an aberration. There is global recognition that India will continue to be a major demand growth centre for steel. The 12th plan allocation of nearly 10 per cent GDP for infrastructure development should ensure that at no point till at least 2020 steelmakers will be visited by overcapacity problem," says SAIL Chairman Chandra Sekhar Verma.

In its recent assessment of steel outlook, World Steel Association (WSA) says, "India is expected to resume its high growth trend after a sluggish performance in 2011. In 2012, India's steel use is forecast to grow by 6.9 per cent to reach 72.5 mt. In 2013, the growth rate... to accelerate to 9.4 per cent on the back of urbanisation and surging infrastructure investment." So, all the new capacity in the pipeline for SAIL, Tata Steel and the rest should not be facing the prospect of staying idle at any stage. According to Verma, what, however, is to be watched in the global context of softness in steel is at what prices "we will be selling our products in the low import duty regime". For China the temptation will always be there to target India for disposal of a portion of its surplus steel. WSA says as China has entered a "less intensive steel growth phase," its use of the metal will rise four per cent this year to 648.8 mt and then again by the same low rate next year to 674.8 mt.