The global steel market is passing through an uncertain terrain. The world steel market crisis started in the South East and East Asian nations after the economies collapsed and this was followed bythose in the CIS and Brazil.The recovery, if should be any, depends to a large extent on the performance of these economies in the coming days. More important is the region that had seen steel production falling much below demand- as in South East and East Asia. The countries in this region even if there is a marginal turnaround by some degree, the growth is unlikely to be based on the construction sector's activities. This region's growth, may be remembered, was based on heavy investment in steel intensive infrastructure and housing. They do not need add to what they have already done in the past years as there is clear evidence of adequate infrastructure to support their economies for a long time. They also have enough housing, residential as well as commercial, to support a much larger growth in industry and services sectors. Therefore, the steel intensity in the new phase of growth, if at all takes off, will only be limited. The erstwhile steel hungry nations will go without much appetite for it now.Nevertheless, many have seen the recent turnaround in these economies with larger optimism. But, for reasons cited above, growth in steel demand in these economies is unlikely to be a long lasting phenomenon.

If the global slowdown persists, major investment projects in the developing world including in this region will be short of capital. Even if there is a temporary halt in investments, the overall economic impact of this on the economies will be such that demand for steel will slowdown. Fall in investment will have marked impact on income and thereby on demand for goods and services. Most believe that the full impact of the recession has already been felt and that conditions cannot worsen any further.

The overall feeling is that the steel industry, backed by some turnaround in economic activities globally will be up in shape beginning 2000. Well wishers are not always right. Therefore, one will have to keep a tab of the coming days before arriving at a conclusion.

There is excess capacityeverywhere- in the upstream facility as well as in the downstream.

Excess capacity has a tendency to over produce as it is not economically viable to keep huge capacities idle in a capital intensive industry like steel.

The problem of excess capacity or production takes a different form in steel business. Unlike consumer goods, excess steel produced cannot be got rid of by promotional retail schemes like an `exchange offer', discount sales, etc. to woo the customers to buy more and consume more.

The excess production lies as inventories, means only an additional cost to the producer.

This is why, producers get frustrated when stocks are in excess. Strong competition leads to discounts. This does not in anyway reduce the industry woes.

By discount, one company may be able to sell more and dispense with its own stock, but at the cost of another country's economy. When competition is strong, price cuts are common, but, problems never get solved by such means. In fact, the steel crises get sorted outnaturally when economies recover to invest more and produce more. The increase in players in depressed scenarios merely promotes despair and speculation. This why the market is always volatile and sometime unpredictable. In the present crisis, there is no quick solution. The industry will have to wait till demand picks up as a consequence of economic revival everywhere or somewhere in the universe. The global market is still without a clear direction. For example, the prices of hot rolled coils (HR coils) are now hovering around $215 per tonne for exports from Europe. The prices of HR coils, in January, were $190-$195 per tonne.

There are definite reasons to be happy with this upturn. But, the euphoria may only be short lived if the global demand doesn't pick up adequately. The current strengthening of the market is more due to three major factors. One, is reduction in supply, meaning companies have been underutilising capacities, which comes at an expensive price. Two, trade actions across the globe andparticularly in two major markets, USA and EU, have shut the doors on countries that are capable of supplying steel at lower prices. As a result, the domestic steel prices in many countries have increased. The international prices, in response have also gone up. The third important factor is that the steel prices had dropped to levels far below the production costs of many companies. Although many have felt that this is just what the steel industry has been waiting for, the continuation of this uptrend is unlikely as the buyers would find the current price level too high. Therefore, the pressure will be on.

In fact, even today, there is a lot of distortions in the world market. Despite increases in some corners, the prices of steel from the CIS countries are way below those in Europe and USA. The question is will CIS countries jack up their prices to match the global price line or pull the others down to corresponding levels. The latter appears more likely because, they are more desperate than therest.

The trade actions, apparently against dumping and subsidies in most parts of the world may not even yield the desired results. In fact, actions against Japan, CIS and Brazil on imports of HR coils by the USA have slowed down imports from these countries - but not from others. Even if the major players are out of the market, there will be countries like South Korea ready to jump on the fray to grab the freshly vacated markets. Over a period, the US market, by all probability will be left with competitive prices not allowing for any major increase in the domestic prices also so long the global price line remains depressed. Although the domestic prices in EU have firmed up significantly, low export demand and flood of imports from unexpected zones will put pressure onthe EU market sooner or later.Therefore, in spite of all the euphoria the second quarter price rise may be difficult to sustain.

The author is the chief economist at the ministry of steel and mines, New Delhi. The views expressed arehis own and does not reflect those of the ministry.