The year 2016 ends in a month. No abrupt change in the steel business scenario is predicted except natural calamities. The US would have a new government installed in January. The economic policies aimed to rejuvenate the US economy are, if the reports published are to be believed, likely to promote US manufacturing sector, remain vigilant on cheap imports especially steel and manufactured items, grant stimulatory investment in replacing and building up of the infrastructure thereby ensuring jobs and income generation for US residents. A kind of nationalistic flavour would embody all the economic decisions of the US and may be a little deterrent for all that is generally associated with Globalisation.
Already the US has expressed reservations in signing of free trade treaties between nations like Transatlantic Trade and Investment Partnership (TTIP). The WTO compliant trade restrictive measures by the US (AD and CVD) including continuation of SIMA and anti-circumvention investigations into rules of origin would be frequently resorted to and implemented. Steel Caucus lobby by US senators would be quite vocal. One thing is certain. If the growth-restraining factors are tackled appropriately by the US that are going to be region-specific measures, it is quite likely that regional weaknesses may not escalate further and assume a global proportion. A reasonably strong demand from the US would, on the other hand, provide ample opportunities for developing economies other than China to renew their export efforts and a good platform for raw material prices not to go for a sharp decline and reaffirm the status for US dollars.
Steel prices in the penultimate month of 2016 have witnessed a rising trend. Chinese export offers at $443/t fob Tianjin for SS400 HRC against the current average cost of $420/t provide an ebitda margin of $23/t which may still prompt most of the large producers in China to emphasise higher capacity utilisation more than eliminating capacities. In the current year, Chinese steel exports are almost at the same level as last year, crude steel production marginally lower than last year and imports of iron ore around 9% higher. The stimulus measures of infrastructure building in hitherto untouched provincial cities would enhance Gross Fixed Capital Formation as a percentage of GDP from the current level of 46%.
Coking coal spot prices at $313/t fob Australia are facing a lower demand in the year ending month and are projected to come down to $260/t in January 2017. Iron ore (62% FE) prices have also been projected to fall from the current $75-80/t cfr China to reach $70/t cfr China by January 2017 and to drop to around $45/t in subsequent months. Rising scrap prices (prices for 80:20 HMS grade scrap at $274/t ex-US is slated to move up to $350/t in another two months) are likely to come down by more than $100/t in the following months. The phase of high cost raw materials in raising steel prices all over the world is going to be a reality.
In India the rise in prices of finished steel in January 2017 would also be primarily guided by imported coking coal and iron ore prices. The rising scrap prices would immediately put pressure on raising the prices of sponge iron. The export offers from India for HRC, CRC, galvanised and coated sheets would be rising due to increase in domestic and global prices. It also implies that a fall in raw material prices may lead to a corresponding drop in finished product prices. However, a strong domestic demand may prevent this phenomenon. It is expected that the market (including the retail trade) would become normal after the initial hesitant response to demonetisation is over. The demand in consumer durable and real estate market following rise in disposable income at the hands of the middle class and salaried class would be realised after two or three months period. The increased realisation in the domestic market would enable the producers to bring down the stressed asset component and relieve the banks partially from the scourge of NPAs.
This scenario presumes the normal execution of the business processes in India. Any sudden departure from this established picture may reverse the trend and weaken the normalisation process for the indigenous producers.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.