By now, it is fairly clear that steel prices are set to weaken further. This will also bring down iron ore and coking coal spot prices. Reduced iron ore and steel business to China has already hit the world shipping business with Baltic Dry Index (BDI) losing significantly in the past month or so.
The problem this time around has come from the demand side of the market shrinkage in demand rather than from expansion of production.
While many would look at the current situation as a temporary one and expect that to fade away in a couple of months, there are reasons to believe that the development in the economies across the world are threatening to prevent any quick recovery in steel demand and that the market will be back to the same conditions that prevailed for nearly three decades from the 1970s, post oil crisis.
The developed nations since 2003 have rebuilt and renovated a substantial portion of their industrial and transport infrastructure and added new ones.
Today, effectively, they do not have the need to further add on to it. They do not also have the money to do so if needed.
Unless they go protectionist, they are not expected to go for steel-intensive industrialisation. They have excess housing stock at the moment and will not therefore add much more. They will be focused on businesses that do not require a lot of steel.
The developing nations, on the other hand, face massive infrastructure deficits, exhibit competitive strength to raise industrial capacity and also have a large population whose lifestyle changes and improvement in quality of living can create a big market for industrial goods, including those which bear steel.
The growth of economies in south east and east Asia, in fact, provided a strong support to the steel market in the crisis decades of the seventies and eighties, which, otherwise could have collapsed to pits.
In the nineties and in the first decade of the current millennium, despite a phenomenal growth in steel demand from the developed nations, it was China all the way.
Today, there are no Koreas or Malaysia to come to rescue. It is China, the Middle East or India.
China will go a long way, but, if there is no economically strong and growing regions around, how far will it be able to pursue an export -ed growth path to support continued steel demand growth and steel production based on imported raw materials?
It will make more sense for China to discourage steel consumption and change the growth model to an optimal solution.
The country has used more steel than it needed and has been continuing to do so. A lot of it can be saved. They do not plan their business too well. They build, demolish and rebuild structures routinely.
They have allowed for excessive play of speculation in the housing sector to raise the level of the housing stock far beyond the real demand.
One can see steel everywhere, much of which could have been avoided.
These are exhibits of a situation with free flow of newly acquired wealth. A bit of rational thinking may force them to change course from the excessively investment oriented growth strategy they have followed so far. This will mean, steel demand in China will, at best, grow only slowly.
The Indian steel growth story will be based on how the domestic investment scenario shapes up. The high rate of inflation will cut into potential household savings to reduce in turn the capacity to invest.
With crisis in Europe and not so happy financial outlook elsewhere, the flow of FDI may also be adversely affected. Even if there are good reasons to expect strong competitive positioning to support steel projects in India, poor global outlook and increasing risk of protectionism may turn many of the willing investors away.
?(Views expressed in the article are personal)asfiroz@yahoo.com