The good news is that the global economies are doing better. What has not been very encouraging in this is that job market is still weak. Unemployment may not be rising but in absolute terms it is still high in most economies that went under the recession in the past one year. The banking sector is heading back to stability, but, there is still a long way to go to be back to full strength. The revival of the global economies may take the ?W? shape, with another significant fall looming large, before the final growth to stability takes place.
While the purpose of writing this piece is not to discuss the global economic prospects, it was necessary to spell out some thoughts on it because the same hold massive importance to the future of the steel industry.
There are serious concerns about the growth prospects in China as the country is losing exports and value of their investments in US dollar treasuries. They will have to take a look at the massive growth propelling investments they have made so far in the aftermath of the global crisis to keep the economy going creating jobs and incomes for the local population. They are building roads and railways which otherwise they would have done possibly in another decade or two. The question is once this is over, what more will they do now?
China has been largely responsible for the turnaround in the global steel industry. Today, there is a serious realisation that they may not be able to carry on this way as the sheer number of such sensible infrastructure development projects that they can afford to take up having commercial merits and logic is very small. Many of them may not have any contemporary relevance and remain a show piece for years. Therefore, once these projects are over, to country will have to go into reckless infrastructure spending merely to keep the economy going or focus on areas that do not require so much of steel to support. The first option will certainly hit the banks and the financial sector.
Chinese steel makers, with massive production capacity in hand, cannot also take the export route to survive. They have already raised their exports sharply in July and the August or September results are also unlikely to be different. If China goes into an export overdrive, the world steel prices will collapse. The iron ore and coking coal prices will, however, gain from it in the short run. But, if they do not, and decide to close capacity, the steel prices will find stability, but, iron ore and coking coal prices will fall.
The global economic turnaround will have to be examined carefully and it is not advisable to come to any hurried conclusion on them. Commodity demand and prices have shot up because of restocking and the euphoria generated by the first sights of demand growth. Lower costs funds have triggered efforts to complete projects left halfway through.
The worry is that the hitherto lesser affected developing economies such as India can still go a few yards more with huge household savings and government job security helping the upper and the middle strata of the population to continue by cars and appliances or even residential properties. But, jobs in the private sector are bound to be lost. The ones already lost are not expected to return as it is time that every corporate will try to get work done hiring fewer hands. The global economic revival will continue to pass through a lot of turbulence. The economic order will change and so will the quantum and the nature of steel consumption. The steel prices will head south in the coming months.