The Hindu : How long will the steel price rise last?

Online edition of India's National Newspaper
Thursday, Jul 18, 2002

Business

Business - News Analysis

How long will the steel price rise last?

By N. N. Sachitanand

BANGALORE JULY 16. Just when the Indian steel companies, as well as their creditors and shareholders, were beginning to breath easy consequent to the firming up of steel prices during the last six months, J. J. Irani, President of the Steel Alliance, set the cat among the pigeons by stating that the international price rise may peter out by the beginning of next year. The Steel Alliance, incidentally, is a cluster of five of the biggest hot rolled coil (HRC) producers in the country. The HRC market was the worst hit in 2001, as can be seen in the price trend graph. The prices in 2001 were half of the reigning prices in the mid-1990s, when the new HRC plants in India were conceived.

The veteran steel man, J. Mehra of Essar Steel, is inclined to agree with Dr. Irani. According to his reading of the situation, the economic downturn in the U.S. and the EU, which began in early 2000, caused a mismatch between global supply and demand of steel, particularly in the flat products segment that caters to consumer goods such as automobiles and white goods. This caused a slide in steel prices during the latter half of 2000 which cascaded into an avalanche by early 2001 when the depressed CIS countries, desperate for hard currency, started flooding the globe with their steel at rock bottom prices.

"In a time of dropping prices,'' explains Mr. Mehra, "the tendency of consumers is to postpone purchase and wait for a further price drop. When steel consumers shied away from buying, the desperate and panicky producers further dropped their prices, thus worsening the situation.''

The end result was that considerable steel capacity in the U.S., EU and Japan got mothballed or totally taken out due to bankruptcies. According to figures provided by the International Iron and Steel Institute, the average annual growth rate of world crude steel production was plus 2.4 per cent between 1995 and 2000 but a negative 0.1 per cent in 2000-01. Finished steel consumption in the U.S. dropped to 103 million tonnes during 2001 from 115 mt in 2000. Similarly, the consumption in the EU dropped from 145 mt in 2000 to 142 mt in 2001.

The sole exception to this trend was China, where a vigorous growth in the automobile market and heavy investment in infrastructure led to a consumption of 170 mt of steel in 2001, compared to 141 mt in 2000. But for Chinese imports, the steel market in 2001 would have further plummeted.

So, what has caused steel prices to increase from the first quarter of this year, particularly in the U.S. ? Several things, says Mr. Mehra. One is the depletion of steel inventories with corporate consumers, consequent to their postponing of purchases. Second is the revival of the U.S. economy, especially its automobile sector. The price rise in the U.S. has been sharper than in the rest of the world due to the imposition of import restrictions under Sec. 201 to protect the domestic steel industry.

Why the price rise may not last, argues Mr. Mehra, is because the mothballed capacity in the U.S. is likely to be brought back now into operation, a process that may take around six to eight months. This may again even out the supply-demand mismatch and cool off the price rise, particularly when the rebound of the U.S. economy is still not well defined.

Not so, avers A. K. Singh, director (commercial) of SAIL. He is confident that the prices will remain high right through 2003 and even 2004. His reasoning: not much of the capacity in the U.S. shut down during the last 18 months can be brought back into production, more due to financial than technical reasons. Second, with the improvement of the Russian economy, the steel from the CIS countries is being absorbed in that region itself, leaving little for export to the rest of the world.

Third, China is expected to substantially increase its imports since that country has started colossal construction projects in preparation for the Olympics which it will be hosting towards the end of this decade. A fourth positive point for the global steel industry is that the Japanese economy may start emerging from the doldrums next year.

Mr. Singh is confident that the scenario in India will be even better. While steel consumption is growing, albeit slowly, no investment in fresh capacity has been forthcoming for the past four years.

Since a new plant takes nearly four years to come up after the investment proposal, this means that the existing surplus, mostly in the HRC area, should be absorbed by the end of next year. So, the domestic demand-supply situation can tilt in favour of demand (even for flats), which should harden domestic prices. Of course, if the Indian economy hits the 8 per cent GDP growth rate envisaged by the Prime Minister recently, then the FIs can even begin to dream of cleaning up their NPAs caught up in the steel industry!

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