Global steel crisis offers opportunities for efficent mills

Written by AS Firoz | Updated: Apr 21 2009, 04:57am hrs
Should India go all out to expand steel capacity despite all the current bad news around and no strong prospects of growth seen in the domestic market in the near future There are widely divergent thoughts on this.

One, steel demand in the country will take time to recover, a couple of years, say, and the global outlook is pathetically pessimistic. There is a growing concern that steel production in the world will get back to an average annual growth rate of anything between 1.5-2%, experienced through the seventies till the end of the nineties, and in the face of a global excess capacity of nearly 3-4 hundred million tonne of crude steel, the merit of investing in steel is questionable. It will take years and years to clear off the excess supply conditions and hence, at low pricing conditions, the profitability will remain under huge pressure.

Two, alternatively, there are reasons to brush off such negativism in the extreme and think of the new conditions of development in the developing nations which will bring investments back on track and steel demand will start moving up once again after a temporary halt. Savings from the incomes of the people of the world, corporate and the governments will have to be re-allocated to investments in new areas, and more importantly, where it is needed the most. The world may not require more factories to manufacture goods for consumption immediately. But, infrastructure for industrial development and to move people around and housing are still in huge deficit. There are pockets of surpluses and that is what is visible everywhere and all the time. This is what is talked about often. With the present day reality of one of the worst phases in the history of the steel industry being extrapolated unduly for many many years, the steel industrys future is merely written off.

The world economy will take a few more years to get back to its feet. There is no escape for the steel industry from this. But, the efficient steel makers should see an opportunity right here. Globally, it is becoming clearly evident that the high cost steel producers, largely those without low cost raw materials resources will find their days numbered. Those with high labour costs, mainly the ones in the developed world, will find it harder now to compete against those who have low cost workers and brand new high technology plants with phenomenal productivity in the developing countries, such as in China, India, the Middle East and so on. The product development curve the mills in the developed world boast of have already flattened out. The top is being reached by most of the new fellows.

With the steel producers in the developed world in deep trouble, a vigorous pursuit to grab more space in the global steel mart will push the high cost mills in the west to the edge. There are not too many opportunities to acquire or merge and remain afloat this time around. The steel makers in the developing nations need not acquire existing facilities in the developed world. They should, if possible, buy the plants and machinery and bring them to set up new mills here, if greenfield options, look more complex.

The author is a strategy consultant and the views expressed are personal