What the steel industry feared the most seems to be happening now.
China’s steel demand has weakened and the prices have dropped, quite significantly, in the past two weeks. Most in the industry and analysts have expressed extreme concern about the recent developments as everything has gone against their expectations, especially when the steel market in the country was holding ground amidst a global avalanche with a notable price rise recoded in December and January.
Most believed that the stimulus package announced by the Chinese government would work well for the industry. We knew that it would, despite our belief that the actual incremental investment would not be as much as announced.
But, the impact that was expected to be made on the steel industry was highly exaggerated. At the most, it would have brought in another 15 million tonne of new steel demand over a period of three years. This almost equals some of the estimates made for Obama’s package in the US. These are peanuts considering the size of the steel market in China, where over 420 million tonne of finished steel is consumed (as also for the US).
Chinese authorities seem to have decided to cap crude steel production at 460 million tonne in 2009, down from about 500 million tonne in 2008 and a potential 550-580 million tonne estimated before the onset of the global crisis.
Exports from China have also fallen. They have hit barriers as global steel demand is in the downswing elsewhere.
Implications of the Chinese slowdown in steel production will be strong, immediately, on the ongoing iron ore price negotiation for this year.
If Chinese demand remains weak and steel prices head down, the iron ore miners will lose pricing power. This is bad news for the iron ore miners in India too as spot prices will also be hit hard, unless the miners here decide to cut production sufficiently to maintain their strength in the market.
The mining companies worldwide have already announced cuts in production, more to adjust to a realistic demand size, but not sufficiently factoring in the worst that can happen in China. In fact, this could have helped, to some extent, the recovery in the iron ore spot market till the other day from its pits in November or so.
The point to note is whether this reversal in trend in China in the past weeks should be taken as a temporary development in a well-known volatile market or that the same indicates longer-term woes of the steel industry in the country. There is no doubt China will be badly hit by the recession. It is export dependent and the global markets for their products are shrinking fast. Whether the entrepreneurs have money or not to conduct day-to-day business or invest to add capacity, the point is there is no sense left now for them to invest when future prospects are not in sight.
?The author is a strategy consultant and the views expressed are personal