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.