Steel firms going bankrupt may soon be a reality

A S Firoz

The steel prices in the world market are stuck at the bottom. The news of production cuts are becoming common, although it is still doubtful how much of that is really happening. If it is really happening, there are reasons to hope for prices not to fall further, as the winter sets in the northern hemisphere. We are not talking about the possibility of a price rise because we know that demand is getting weaker daily.

Are these conditions for a shakeout in the industry ? The steel industry had faced similar conditions in the past and barring some really weak ones, all survived. The steel industry, globally, has never really been in a do or die battle. Those who perished died natural deaths. Most of the surviving ones fall sick with every downturn but recovers with the market upswing. The problem is that this has become repetitive, as the steel market is in shorter cycles of fluctuation.

In the US, the latest round of crisis has sent many steel companies take cover under Chapter 11 bankruptcy provisions. As per reports, there are about twenty major steel companies now bankrupt. LTV, Acme. Trico, Wheeling-Pittsburgh, Algoma and many others. It will be unrealistic to believe that all these steel-makers will die. With some strong government support and a turnaround in the economy, some of them will get back to shape. But, not all. The weaker among the lot have no future for sure - even if imports are brought down. For many such companies, the battle is for survival.

By the second quarter 2002, the steel prices will start firming up. All will then forget the past and dream of good money in the days to come.

What is surprising is that the steel industry does not seem to be losing its appetite for investment. The greener pastures, even if fewer, continue to attract those whose coffers are full. For example, Pohang Iron and Steel Company (Posco) has announced its plan to invest $100 million on fresh steel capacity in China. Usinor has several projects, including one for a 800,000 cold rolling mills, to be enlarged to 1.2 million tonnes capacity subsequently, in Brazil, where CST is taking a stake. The news of capacity additions on existing plants and construction of new mills are coming from China, Brazil, Iran, Venezuela, Ukraine and many other countries despite the current state of the market being called absolutely hopeless.

Ill informed, desperate and helpless, the steel industry is looking for global solutions to the problem of the mart that are not easily available. Many think, and to some extent correctly also, that the problem today is on account of slow and inadequate information flow. It was felt that an early warning system should help the individual nations to take guard on the first premonition of a danger. A lot was discussed in one of the recent OECD meetings. Nothing emerged out of it. The problem was more complex than was visualised. The latest under discussion is the possibility of a global agreement on capacity cut. It has been perceived, again correctly, that the root of the problem lies in global excess capacity. Nothing may come out of it. What has not really been discussed so far is the possibility of a change in global trading rule in steel. President Bush talked about it recently.

So far, steel is being traded among the WTO member nations as per the rules of the WTO, the occasional violations and accusations of violations notwithstanding. If the rules are to be changed, the question will arise whether that will be within the framework of the WTO and that there will be new provisions brought in especially for steel. Although it looks difficult at the moment to arrive at any reasonable solution for steel survival within the trading rules, there are greater chances that there will be something coming out of it.

Whatever is discussed to see the steel industry through another crisis is for the industry’s future. But, for the time being, the accounts of the steel companies published everyday do not have much to cheer about at present. The gloom prevails.

(The author is Chief Economist, Economic Research Unit, JPC and the views expressed here are personal)