Steel production continues to fall. World prices have been somewhat stable in the last couple of days. Similar stability has been observed in the Indian market too. But, it is difficult to predict what is going to happen from now on. The bad news about the global economy continues to pour in. But, the pure panic with the huge stock of steel everywhere in sight might have stopped somewhere. Destocking has taken place at the users’ end to a significant extent. But, demand remains low and despite production cuts, the stock levels with the producers are high. Therefore, there may not be very strong reasons to remain comfortable with the current position, as the worst for the industry may not have arrived.
But, if steel production globally drops by about 10% next year and China’s by about 15%, the steel market will be back to some rational pricing conditions. The extraordinary profitability in the industry was not to remain forever. The industry should be happy with what they have received in the past few years of great time.
If steel prices fall, the industry profitability does not go down automatically in the same proportion. A lower steel price will trigger reduction in the raw materials prices, usher in a more rational internal management, urge the producers to cut costs and place them in a stronger position to bargain for sops from the government.
But, extraordinary conditions in the market will also make many sick and bankrupt. There will be death and injury. This will open up opportunities for consolidation through mergers and acquisitions.
However, consolidation should not be pushed too far. There are many lessons to learn from the current crisis. Larger ones get hit badly in the fall.
Capex plans of the steel majors are to be reviewed. The banks will look at them more closely. They will have difficulties in getting equity finance as well. It will prove good for the industry if capacity expansions are delayed by a year or so. It is good for China as also for the global steel industry that the Chinese steel industry is being rationalised to lower production levels and effective capacity. They wasted resources and were responsible largely for the current state of affairs.
Rationalisation of steel capacity globally will have its impact on the investment plans of both, the iron ore and coal industries as well. Worst hit will be the new mining companies in Australia, Brazil or Africa and especially those investors who bought stakes in them at enormous costs. Most of the mining companies have seen their stocks performing horribly. With their asset valuation falling every day, their ability to fund the new grand projects with them will also shrink.
Indian companies looking for natural resources assets overseas will have to redo their strategic investment plans. Again, what one is worried about here are the excessively impulsive actions within the industry, withdrawing from the mining projects, considering the current situation. Mining should be considered in a longer-term perspective.
The author is independent strategy consultant, Steel and Natural Resources
Tense times
•Demand remains low and despite production cuts, the stock levels with the producers are high
•If steel production drops globally by 10% next year and China’s by 15%, the steel market will be back to rational pricing conditions
•Rationalisation of steel capacity will have its impact on investment plans of iron ore and coal