World steel price recovery likely to be short

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The steel price recovery on the world market is likely to be short. Trends exhibited in the last few weeks have not been sustained as per reports in the last couple of days. This means the entire increase expected for the third and fourth quarters has already been achieved.

Seasonal improvement in demand (over previous months), cuts in steel output and effects of the end of destocking were the only factors that worked. What was missing was real and significant demand rise, year on year. While there are still markets which are not too bad, the main problem lies in the weakness of the Chinese market and the relative uncertainty about it.

While there are reasons to remain optimistic about the growth prospects of longer term Chinese steel demand, current problems on the supply side may have far-reaching implications on the global market. China’s steel production growth, at 28.1% in the first seven months of this year, can only be seen as an exaggerated and mindless response to demand growth in the country in the past few years. While one cannot avoid development of overcapacity in a relatively uncertain and volatile market, the way the Chinese steel industry grew was certainly devoid of logic at various instances.

There have been structural imbalances in product mix, scale of integration and choice of technology. One fears miscalculations and failures in China may hit the Chinese steel market first and then the global mart. If the Chinese steel prices are weaker than in the rest of the world, there are reasons for it, the most obvious being quality problems associated with steel from China.

There are reported complaints of poor quality, mismatch of specifications and failure to match the desired size and chemistry in the international market. This problem is certainly not true of the very best of Chinese mills, but of many smaller and medium-sized plants, where volume is top priority and not quality or customer satisfaction. Perhaps they have yet to climb on the learning curve. So, a lot is produced mindlessly and then thrown up in the market. If it sells, it’s fine, if not, accept any price.