Yet, the steel makers have perhaps no clue as how to effect the necessary production cut. Each one of them seems to be still waiting for others to shut down, partially or fully. Shakeouts do take place in business, but not when it is required the most. Therefore, it is not surprising to see that the steel production has jumped 10.8 per cent in the first seven months of 2000 over the corresponding period last year.

The July 2000 output was 9 per cent higher, as per the latest report of the International Iron and Steel Institute (IISI), Brussels. It is the much familiar story in this month's IISI monthly bulletin.

The CIS countries continue to record huge increases in production -- 20.1 per cent in the first seven months and 12.9 per cent in July, over the corresponding periods last year, further threatening the global prices. The increases are high for Japan (16.7 per cent), South America (13.7 per cent), North America (12.1 per cent), India (11.4 per cent), European Union (8 per cent), South Korea (8.8 per cent) and the Middle East (8.1 per cent) during January- July period.

It is fairly well known that steel output cannot be dropped quickly. Although there are reports of production dropping in the US in the last couple of weeks, the steel industry elsewhere does not seem to have taken note of the seriousness of the present situation in the world market. One view that still seems strong is that the present lows in steel prices are temporary matters and the market would revert to normalcy once the stocks globally are back to acceptable levels.

Most accept the steel prices to gain from September onwards, if the current situation is assumed to be not too bad. But, how far will it go that way ? For example, do we expect the prices of hot rolled (HR) coils to be back to $300 plus per tonne level in the export market ? Even the die hard optimist will not say so.

The Russians have dropped their offers of these materials already to $170 to $185 per tonne level. These are straight $100 per tonne lower than the prices the Russian materials fetched before the ongoing round of price spiral. Ukraine is selling those at lower prices. The European Union (EU) and the Japanese have also dropped their export prices, but not as much and are waiting for the market to turn around. The strong EU market is giving some temporary relief to the European steel makers, but that is temporary. The Asian and Latin American producers are getting offers in the range of $220 to $240 per tonne. The prices of slabs and CR sheets have also fallen. Billets and other long products prices are also low.

The picture above is clear enough to indicate how difficult will this be to expect prices to jump back to the pre-crisis level.

The present problem has the potential to become one more crisis for the steel industry because the current production level is so high that with inventories increasing everyday, the market is being driven to a state of chaos, speculation and frenzy.

The global crude steel production remains at an annualised rate of about 850 million tonnes. This is 744 million tonnes in finished steel equivalent approximately. Reasonably expected, this year's consumption is to touch 722 million tonnes. This leaves a potential inventory build up of 22 million tonnes from current production. During 1999, the global inventory level apparently had fallen. Therefore, some of this quantity would have already gone to replenish the stock level. (Today, the stock levels maintained are also much lower than in the past.)

Whatever might have been this quantity, the fact remains that the quantity remaining over and above that is high enough to be of major concern for the steel makers. In a 150 million tonnes long distance ocean trade market, even a 10 million tonnes stock build up can play havoc.

This is what has happened. The point is if the production does not adjust to demand, sufficiently and quickly, the months ahead will not see much change in prices. The adjustment, even if tried, will be hard to achieve. To fully meet the current global demand, the crude steel production should be about 825 million tonnes. Already, 496 million tonnes have been produced in the first seven months. This leaves us with another 329 million tonnes to produce, at an annualised rate of 790 million tonnes. The July annualised rate stood at a huge 867 million tonnes!

It is absolutely unlikely that the steel production globally can be cut so drastically in the next few months to bring the supply level close to demand. With no sure sign of demand picking up (in fact, there is more likelihood of a drop of the same from the 2000 level next year). The supply demand imbalance seems to be quite the same as it was in 1998 around this time. The difference is the production was not as high that time and sudden demand shrinkage had precipitated the crisis, which would have otherwise also taken place had the production rate of the first-half of 1998 were maintained.

Apart from the need to respond quickly to the current market problem the steel makers should come out of the wrong perception that steel consumption in the world and more particularly in the developing countries, will increase every year, may what comes.

(The author is convener of Steel Exporters' Forum and the views expressed here are his own)