steel balance

The steel industry has come through a quarter that saw the profits of almost all the majors fall by about 50 per cent, and that of one disappear altogether. This may mark the low water point, for the worst seems to be over, as steel prices have recovered in the past few weeks. While a full recovery, however defined, is a long way off, the industry can now look forward to more normal times—even though most forecasts for the world economy talk of a slow recovery after a poor 2009. The improved climate for steel is in part influenced by the news from China, which is by far the world’s largest producer as well as consumer. As the Chinese economy has slowed, the Chinese steel industry has cut back production, and therefore no exports are taking place. India’s production-demand equation is also in broad balance, and so therefore is that of the rest of the world. What this has meant is that hot rolled coils now sell at a price that gives a reasonable return to the efficient producers. Admittedly, there are reports even now of headcount cuts and production rollbacks by steel producers in some countries, but that does not reflect the over-all situation. The production cutbacks announced last year could therefore be a thing of the past. Demand restoration will be slow, given the global economic outlook, and therefore no one should expect a robust upswing in prices, although the drawdown of inventories has been more or less completed. Prices currently are around 50 per cent lower than their (abnormal) peak last year, and are unlikely to see much of an uptrend any time soon. The benchmark hot rolled coils are moving at $500 per tonne, compared to $1,200 at the peak of the commodity bull run last year. Steel producers，bottom lines could get some more relief as new raw material contract prices will kick in from April, for these should give substantial relief to manufacturers. In the last quarter, they were hit hard by the double-whammy of collapsing prices for finished products even as raw material costs remained high because of long-term purchase contracts.
Improved margins, when they come, will allow Indian manufacturers to revive their investment plans. The Jindals have already announced that they will be taking a fresh look at their investments, and this is likely to affect their large greenfield project at Salboni, in West Bengal. Other project promoters, who have been waiting for land and/or iron ore commitments, are not pushing on those fronts any more. For there to be a sufficient revival of demand, and for large investors to embark on new projects, one key issue is financing (and not just for the steel industry). But the global financial sector is still in a mess, and Indian banks cannot take up the slack completely—as the evidence this financial year has shown. A full-scale revival of the steel industry will be the harbinger of a global economic revival, and that in everyone’s opinion is still well beyond the horizon. So it is something to be grateful for that, while there may no joy yet in the steel industry’s numbers, at least the pain has gone.