Steel: take the slowdown seriously

The bad news continues to surround steel. While many believe that the current state of affairs in the industry is the result of an overreaction to the sudden disappearance of liquidity, there are reasons to believe that unfortunately it is not so simple. There is clear evidence of demand destruction around the world as also in India. The government needs to do more and that too differently, to see that the economy at large and the steel industry in particular remains in shape.

The government has two issues to confront. At one level, it has to see that consumption of steel increases and the government wants to achieve that at one level by supporting the steel consuming sectors such as construction and automobiles. At another, it seeks to pull the steel industry out of trouble by creating conditions so that steel prices can be raised in the home market. The government understands that the industry faces competition mainly from imports and if the same can be restricted directly or indirectly and the costs of imports can be raised through raising tariff barriers, the industry will get some relief.

Different countries have faced the problem differently in varying degrees. Invariably, each has witnessed a drop in industrial output and a slowdown in construction. All major industrial nations have announced stimulus packages to boost their sagging economies up. The government of India has also done its bit.

However, more thoughts should have gone into devising measures to pull the industry out of trouble rather than trying measures, which in certain cases will be opposed by the user industries and in other will leave the economy with no impact. The actions taken so far indicate that the government has not really appreciated the depth of the problem in the real economy and looks complacent. The steel industry can actually see a catastrophe if not handled carefully now.

Not a measure for the steel industry, but the government should go for a massive income tax cut to boost the sagging sentiments of the working population and especially those who can go for the big spends. Impact of an excise duty cut is not noticed. It does not bring confidence back. Income tax cuts will have a clear impact. It should be so high that people come out on to the street to celebrate it.

Production cuts staring steel giants in the face

Perhaps no soothsayer could predict that steel, the world’s biggest volume industrial commodity, after seeing a growing demand surge six years ago would see a shocking market collapse at the end of July 2008.

Even at the inaugural meeting of World Steel, the new avatar of the International Iron & Steel Institute, someone as important as Lakshmi Mittal wanted us to believe that the demand in emerging markets would act as a bulwark against prices seeking lower levels.

But this is not a typical cyclical downturn we are seeing in steel. As the miseries visiting all base metals and minerals in the wake of global economic meltdown and uncommon shortage of credit will confirm, the road ahead for steel makers will remain bumpy for quite some time to come. However, what remains subjects of conjencture are what will be the extent of fall of steel production this year and for how long the industry’s downturn will last.

The world steel production figures for 2008 are being collated. It is, however, taken for granted that steel output in the year gone by will be marginally lower than 1.324 billion tonnes in 2007. What with groups such as ArcelorMittal, Corus and Severstal having effected big production cuts. China, the world’s biggest producer and consumer of steel, is for the first time exercising discipline in production.
Observers tell us that as we go forward, we will see world steel production falling anything between 10 per cent (Credit Suisse) and 13.9 per cent (World Steel Dynamics) in 2009.

“Even in the event of a 10 per cent setback in 2009, we will be seeing the sharpest yearly world steel production fall as far as memory goes back,” says Sushil Roongta, chairman of Steel Authority of India Limited (SAIL).

As for SAIL, it has made quite a few deft tactical moves, including product mix reshuffling, to negotiate the demand side problems. In the post Second World War period, the biggest yearly fall was 8.7 per cent in 1982.

Thanks to Indian GDP still growing at 6 per cent at least, SAIL is spared the pains of production cuts. But the behemoth is also demonstrating the agility to make those steel products for which demand still remains good. But there is no way SAIL or other Indian steel makers can protect their top and bottom lines as average steel prices have skid from $1,160 a tonne in July 2008 to $500-550 a tonne now.

Looking beyond 2009, steel makers are bracing themselves for a long period of weak demand before a turnaround in world economy creates the condition for global steel production to climb back to the 2007 level and then move forward. There is hair splitting among experts as to whether it will be three or four or five years before steel production returns to 1.324 billion tonnes. The gloomiest forecast comes from an analyst with Moody’s who says we will have to wait until 2013 for the current downturn to fade away.

Using data from the London based Iron and Steel Statistics Bureau, Peter Marsh of Financial Times says leaving out the war years, “there have been only four occasions since 1991” when the world steel industry took four years or more to live down a downturn by climbing back to the earlier production high point.

Aware that steel demand and price falls are fallouts of the worst economic crisis since the Great Depression, industry officials are not likely to be swayed by some intermittently mild improvements in metal prices. Some analysts do see the possibility of steel prices edging forward, albeit haltingly in the second and third quarters of 2009. But they will not guarantee that such price rises are sustainable.

Steel prices expected to rise this quarter

PRICES of steel goods should rise and stabilize early this year after falling steeply in the past two quarters, as raw materials become costlier and demand may be boosted by state infrastructure spending and house sales, industry leaders said late last week.

But realty firms may not hike prices of units, since they had already raised prices last year and will not want to risk losing buyers, a property analyst said.
Prices of flat steel sheets used for roofing and gutters will rise by 3%-5% within the first quarter from current prices, Filipino Galvanizers Institute President Salvio D. Perez said in a telephone interview.

An 8-foot long 0.4mm galvanized iron (GI) sheet, which currently costs P380, may rise to P400, Mr. Perez said.

"We are looking at price increases in the first quarter because prices of raw materials are going up after foreign mills started production cutbacks," Mr. Perez said, adding that scrap iron, also an input, have become costlier as well.

Sberbank and MMK sign credit facility agreement

It is reported that Mr Herman Gref chairman of the board and CEO of Sberbank and Mr Victor Rashnikov chairman of the board of directors of OAO signed a nonrenewable 2 year credit facility for RUB 3.0 billion.

The credit facility is provided to finance the construction of the plate mill complex at MMK with a design capacity of 1.5 million tonnes of plates per year. The plates are intended for production of pipes, building of ships, vessels and bridges.

The implementation of the plate mill complex is bound to further significantly strengthen the general operational efficiency of MMK. It will secure state of the art production of high quality plates meeting international standards and capable to successfully compete both in the domestic and export markets.

In its turn, Sberbank considers the credit line for MMK as another major step towards effective support of Russian strategic enterprises.

Production pruning - US weekly raw steel production dips by 51% YoY

American Iron & Steel Industries reported that in the week ending December 20th 2008, US's raw steel production was 1.022 million tons while the capability utilization rate was 42.9%. Production was 2.102 million tons in the week ending December 20th 2008, while the capability utilization then was 88.1%. The current week production represents a 51.4% YoY decrease from the same period in 2007.

Production for the week ending December 20th 2008 is down by 12.5% WoW from the previous week ending December 13th 2008 when production was 1.168 million tons and the rate of capability utilization was 49%.

Adjusted YTD production through December 20th 2008 was 99.319 million tons, at a capability utilization rate of 82.1%. That is a 5.6% YoY decrease from the 105.206 million tons during the same period last year, when the capability utilization rate was 87%.

District wise production for the week ending December 20th 2008
1. Northeast Coast: 94
2. Pittsburgh/Youngstown: 105
3. Lake Erie: 24
4. Detroit: 29
5. Indiana/Chicago: 269
6. Midwest: 117
7. Southern: 342
8. Western: 42
(In thousands of net tons)

AISI's estimate is based on reports from companies representing about 75% of the US's raw steel capability and includes revisions for previous months.

Downsizing deals - Severstal Warren layoffs total about 300

It is reported that about 300 steel workers at the OAO SeverStal Warren mill began a temporary layoff last Monday with the total expected to reach 500.

Mr Gary Steinbeck director of the USW sub district office in Niles said that the company didn't give a timetable when the furloughs might peak. He said that ''Some people are using vacation time. They'll go into layoff as they come off vacation.''

Mr Steinbeck previously said that 100 of workers will remain on the job to do maintenance and other jobs.

A top executive said earlier this month that the number of laid off workers could change but would be substantial. About 100 salaried workers also were expected to be idled. The mill then known as WCI Steel had a total work force of about 1,200 when Russia based OAO SeverStal bought it in July.

Severstal is cutting staffing and production throughout its global operations as it tries to adjust to plunging orders during a worldwide economic meltdown.

Venezuela urges aluminum firms to present recovery plan

BNamericas quoted Mr Arquímedes Hidalgo spokesperson for the Sintralcasa union as saying that Venezuelan aluminum producers are required to present a sector recovery plan to the country's basic industries and mining ministry during the first quarter of 2009.

Mr Hidalgo said that "The plan will be drawn up under the premise that no more raw materials will be produced for export. It will all be tagged for diversifying what we already have. A Mibam committee in charge of the issue said that USD 1.9 billion will be needed for getting companies up to date."

A mining ministry official said that the ministry has allegedly approved a recovery plan that includes paying off debt and updating technology at companies in the sector.

It may be noted that unions from the four state companies in Venezuela's aluminum production chain namely Alcasa, Venalum, Bauxilum and Carbonorca, have been asking the government for several months to invest in technological upgrades at their plants to overcome the operational crisis they are currently experiencing.

Thainox to halt production for 1 month on weak demand

Thainox Stainless PCL, Thailand's largest stainless steel producer, said on Tuesday it planned to stop production for one month due to weak global demand.

The shutdown would help the firm save costs at its plant in Rayong on Thailand's eastern seaboard, and allow it to carry out maintenance work, it said in a statement. It had sufficient inventory to serve the market, it added.

"However, during this period, the customers will still be able to place an order and we continue to deliver the finished products as usual as the Bangkok office and other departments not directly related to production continue to work," it said.
Thainox, Southeast Asia's largest stainless steel maker, has an annual capacity of 300,000 tonnes of stainless steel, widely used in the construction, automobile and household sectors.

Around 60 percent of its output is sold on the domestic market and the rest exported, according to the company's website. Thainox gets its raw materials, including hot-rolled coils, from abroad.

Kim Eng Securities said in a research note the company was now running at a low utilisation rate of 53 percent, mainly due to a lack of hot-rolled coils.
Thailand's Mahagitsiri family, which founded the company, recently raised its stake to 58 percent. South Korea's POSCO owns 15 percent, and other major shareholders include Nippon Steel .

Recession reports - Russia sets aside USD 340 billion for package

RIA Novosti reported that Russia's government has earmarked RUB 10 trillion for an anti crisis package which is comparable to the country's annual budget. The press office said that "In total, RUB 10 trillion have been set aside for anti crisis measures. This money will come from the federal budget, the Central Bank and reserve funds."

This is almost double the amount of Russia's overall reserves. As of December 1st, Russia's Reserve Fund was RUB 3.6 trillion and National Wealth Fund, RUB 2.1 trillion.

The government is also ready to provide RUB 92 billion from the federal budget in financial assistance to the so called core enterprises, as well as up to RUB 200 billion worth in state guarantees. The government issued on last Thursday a list containing the names of 295 companies that will receive state support including companies working in transport, energy, oil and gas, communications, media and other sectors.

Mr Alexei Kudrin finance minister of Russian said last Saturday that the country would have a budget deficit of RUB 1.5 trillion to RUB 2.5 trillion, which is almost 6% of GDP. He said that spending would not be cut even if oil prices plunged below USD 20. In the 2009 budget approved by parliament, revenue exceeded expenditure by RUB 1.9 billion but the document assumed an average oil price of USD 95 a barrel. Mr Kudrin said that "Even if oil plummets to USD 20 per barrel, we will not slash spending at least not at the federal level. The government would restructure its spending projections but there would be no reductions. He added that public sector employees, pensioners have nothing to fear.

Economic Development Ministry official earlier said that budget expenditure could be cut by 8% but that the figures did not include the anti crisis measures adopted by the government. Ms Yelena Lebedinskaya of the Economic Expert Group said that anti crisis expenditure could push the total deficit to RUB 9.5 trillion. She said that “Deficit would have to be made up with borrowing limited by the budget code to 1% of GDP and tapping the Reserve Fund.”

Stainless steel output will decline by almost 1 million tonnes in 2008

In the first three quarters of this year, global stainless steel production was approximately one percent up on the 2007 out turn. In our September issue we predicted a modest decline in output for the full year. Now we believe that the reduction could be approaching one million tonnes – over 3 percent.

Stainless steel making in 2008 is expected to be down in all regions of the world. Consumption has collapsed in recent months. This was due, mainly, to credit difficulties encountered by both end users and distributors. However, the situation was exacerbated by a number of factors.

Service centers in the industrialized nations slashed prices in an effort to generate cash and reduce stock levels in line with the weakening demand. This had the effect of undermining mill prices because their premium for short delivery had been eliminated. Furthermore, inventories at the mills built up in the third trimester – forcing them to cut selling values in an effort to generate business.

A steady decline in raw material costs has taken place – particularly nickel over the past year but also molybdenum in the last six weeks. This encouraged buyers to limit forward orders on the mills and live off existing material or purchase ex-stock from the service centers. During the early part of the final quarter, the market became awash with steel and serious oversupply ensued.

The steelmakers' reaction to the dire situation was to cut output drastically. This action has been taken by virtually every producer as they strive to re balance supply and demand in the hope of lifting prices.

It is likely that production curbs will extend for the next three months. Mill demand should then start to pick up but output is likely to be restrained into the summer. It is probable that 2009 will be an unprecedented third consecutive year of declining global stainless steel manufacturing.

ArcelorMittal's $400 price hike on offer in 2009 US tinplate deals

ArcelorMittal USA has offered a price increase of $400/ton in its tinplate sales negotiations with various can manufacturers in the USA for shipments in 2009, it was learned in Tokyo Wednesday. As a result, other US tinplate producers are expected to follow suit for their domestic shipments in 2009.

The US steel industry has been operating at less than 50% of capacity since the beginning of December. Its steel capacity utilization was 49% last week. In the USA, domestic demand for steel products is way down in consuming sectors ranging from autos to building materials. As a result, local transaction prices of steel products face a steep fall as a whole.

Under the existing circumstances in the USA, it is a matter of attention that ArcelorMittal USA is trying to win a considerable price increase in its tinplate contract negotiations for shipments in 2009. The price increase is believed to have stemmed from the company's policy to meet a surge in the costs of raw materials.

In the USA, most of the domestic tinplate shipments are usually negotiated under annual supply contracts, for which negotiations on contract renewals start from the October-December quarter of each year. For shipments in 2008, the contract renewal negotiations started in the October-December quarter of 2007 and a price increase of $100/ton was agreed after the beginning of 2008. At the time, though, the price terms settled were devoid of a pass along to meet a surge in raw materials costs because there were no forecasts that prices of raw materials such as iron ore, coking coal and tin would soar to an abnormal level.

In the USA, consumer spending is considerably declining in the repercussions of the financial crisis, a situation that applies to foodstuffs as well. But canned foodstuffs are an exception. Among general households, more of them are opting to avoid purchasing perishable foods while stocking up on canned nonperishable in large amounts for thrifty life. Accordingly, tinplate demand for canned foods is described as favorable.

A major price increase for tinplate shipments in the USA will exert a favorable influence on tinplate exports out of Japan, Europe and the USA to Latin America, market sources forecast. As far as US steelmakers are concerned, they are expected to exercise moderation in reducing what they charge for tinplate exports to Latin America.

Meanwhile, Japan's integrated steelmakers find it difficult to respond with active tinplate exports to the USA even if local transaction prices of tinplate have advanced considerably in 2009. For the main bottleneck, Japanese tinplate imports into the USA are subject to the existing 95% anti dumping duty. Back in June 1999, the US steel industry filed an anti dumping case against tinplate imports from Japan. Then, the US International Trade Commission admitted injury of the imports to US steel mills in its final determination, under which the 95% AD duty was imposed on the imports. The AD duty came under a sunset review in 2006, which led to its continuance.

Baoshan raises prices to trim its losses

BAOSHAN Iron & Steel Co has raised product prices for February delivery to trim losses, its first increase in five months, trade sources said yesterday.
Analysts said the rise is based on a stabilized market sentiment but may not be sustainable. Domestic steel prices stabilized last month after plunging more than 50 percent from June's peak as mills reduced output to sustain the market as demand dropped.

Prices for cold-rolled products were raised by 300 yuan (US$44) a ton, or more than 8 percent, while those for hot-rolled coil were raised by between 100 yuan and 200 yuan a ton, a gain of up to 6.2 percent, according to trade sources and industry consultancy Mysteel.

Prices for zinc-galvanized sheets were raised by 250 yuan a ton while those for color coated sheets went up by 450 yuan a ton, they said.

"Not only Baosteel, several other mills have been gradually raising prices by small margins," said Xu Xiangchun, director of Beijing Lange Steel Informaiton Research Center, an industry data provider.

The Shanghai Securities News reported on Tuesday that several mills including Angang Steel Co, Beijing Shougang Co and the private-sector Shagang Group had raised prices for January. Angang raised prices for cold-rolled products by 230 yuan a ton, it said.

But Xu said he didn't see price rise by major mills spreading into February and March as there were uncertainties over market trends.
"Mills raised prices as they are eager to trim losses, given their expensive inventories of both products and raw materials," Xu said. "Even after hikes, the products would still be sold below cost."

Baosteel, the domestic industry leader, has warned it may post a loss for the current quarter. It fell 2.22 percent to 4.85 yuan yesterday.

Iron ores at China's ports decrease

The amount of iron ore stocked at China's 19 ports dropped to 59.99 million tons as of December 19, down 19 percent from the previous month, according to MySteel.
Meanwhile, prices of spot iron ores have risen periodically.

Zeng Jiesheng, analyst with MySteel, attributed the current situation to steel price rise and the subsequent production resumption of a number of steel plants in recent time.

Currently, CIF price of Indian powder iron ore has increased to 80 US dollars/ton, up 20 percent from early November.

Chinese domestic spot ore prices have risen correspondingly. One example is factory price of powder iron ore in Tangshan up 14 percent to 722 yuan/ton.

Some analysts noted that such trend of iron ore stock drop, and price rise won't maintain long since the downstream steel market hasn't come to a real recovery.
Most steel plants that resume production currently are small and private ones, while large steel enterprises still keep output cut by 50~60 percent since they have overstocked imported iron ores under long-term agreements, according to Du Wei with Umetal.com.

Gazprom Q2 net profit triples

Russia's Gazprom announced that its net profit almost tripled in the second quarter of 2008 as the world's largest gas producer reaped earnings from record commodity prices before the global economic crisis took hold.

Gazprom said that “Its net sales of gas increased by RUR 331,171 million or 44% to RUR 1,089,464 million in the 6th months ended June 30th 2008 as compared to the 6th months ended June 30th 2007. This increase was primarily due to the increase of the volume of gas sold to Far Abroad countries and higher prices of gas sold in each geographical segment.”

It added that “For the 6th months ended June 30th 2008 net sales of gas to Far Abroad countries increased by RR 251,348 million or 61% to RUR 661,554 million as compared to the 6th months ended June 30th 2007. This mainly results from the increase of the volume of sold gas by 26% or 20.3 billion cubic meters and the growth of average prices. Net sales of gas to FSU countries increased by RUR 29,850 million or 22%, to RUR 163,637 million in the 6th months ended June 30th 2008 compared to the 6th months ended June 30th 2007. The increase of sales in this segment is explained by higher average realized prices, which was compensated by the decrease of the volume of sold gas by 2% or 0.9 billion cubic meters.”

Gazporm said that “Net sales of gas in the domestic market increased by RUR 49,973 million or 23%, to RUR 264,273 million in the 6th months ended June 30th 2008 compared to the 6th months ended June 30th 2007. This is explained primarily by increased average domestic price for gas set up by the Federal Tariffs Service. Net sales of refined products increased by RUR 131,540, or 59%, in the six months ended 30 June 2008. The increase was mainly due to the increase of refined products prices.”

It added that “Net sales of crude oil and gas condensate increased by RUR 59,622 million, or 80%, in the six months ended 30 June 2008. The increase of net sales of crude oil and gas condensate primarily resulted from the Gazprom Neft activities: net sales of crude oil increased by RUR 55,277 million or 85%, to RUR 120,081 million in the six months ended 30 June 2008 compared to the six months ended 30 June 2007.”

Wugang to invest 180 millionn Au dollars for 50 pct shares of Australian iron ore mine

Wuhan Iron and Steel Corp., parent of Wugang, will invest 180 million Australian dollars (or 127 million US dollars) to jointly exploit iron ore resources in south-central Australia with the local company Centrex Metals Ltd. (CXM).

The two sides have recently signed a framework agreement, under which the two will set up a joint venture and each holds 50 percent shares. The joint venture will exploit 11 iron ore areas in Eyre Peninsula, with an estimated deposit of 2 billion tons.

Besides, CXM will sell 15 percent shares to Wugang at a price of 0.25 Australian dollars per share. As a result, Wugang will become the second largest shareholder of CXM and owns a seat on the latter's board.

Under the agreement, the two sides will jointly build a deepwater port 60 kilometers away from the mine area, for exporting products.

According to Wugang's general manager Deng Qilin, Wugang will form an annual steel production capacity of 50 million tons in the next few years, but the company only yields 4.5 million tons of iron ores per year, far from its annual demand of 80 million tons.

Deng also said, Wugang will accelerate its pace in building iron ore bases at abroad in the next few years.

Australian CXM, a local listing iron ore producer, is mainly engaged in production of hematite and magnetite, with a licensed exploration area of over 2000 square kilometers.