Steel prices continue to climb down. The weakness in the market is clearly more than predicted. The reasons are well known. What is worrying the industry increasingly is that coking coal prices may not drop much, or even increase, in the next year’s contract, as per forecasts of several researchers.
At one level this can be seen as a ploy of the coal industry to prepare steel makers to accept a higher price. At another, most analysts, commenting on the coking coal prices for the coming year, may have ignored or underestimated the current weakness in the steel market. Lastly, there can still be a genuine shortage of coking coal in the world market arising out of mining capacity and infrastructure constraints.
The steel industry has to prepare itself to face the new forces in the market. It has met with favourable conditions with sympathetic fall in steel scrap and iron ore prices on the spot market. It is certain that iron ore prices will fall in the coming year’s contracts. Similar trends will be observed in the prices of other raw materials too. But, coking coal will remain a major headache for the steel makers who depend on them.
At current prices of inputs, the average high cost steel makers produce HR Coils at about US$750. There are many who can do that at US$300 less. The HR Coils prices have fallen to about US$800 or so, on the lower segments, and about US$850 at the higher. It is closing on to the first level of stiff resistance. What looks from the current situation is that this level will be perforated without much of a problem. It will hit those steel makers largely dependent on purchased coal and iron ore resources. What may happen is that the steel prices will fall further and go below the US$700-mark soon. At this level, the production cuts will reduce supply and perhaps the price will be protected.
If there is no demand for steel and production follows the market, there will definitely be a reduction in demand for coking coal. This is simple. But, does the global coal behemoths believe that they have so many waiting in the queue that they do not have to bother about the price any more even in a falling market?
If coal prices remain high and consequently the costs of production of steel also in large parts of the industry, the national governments, especially in the developing world will restrict steel imports through strong tariff and non-tariff barriers. If the global steel market collapses as a result, the coal industry will not gain from it. It will lose.
The steel super cycle if has changed direction, the weakness is likely to persist for a long time in line with the period of the boom. There is the need for more research on the subject. How long will the steel prices remain weak is also a matter the raw materials industries will have to take seriously before they go forward to their annual contracts in the coming year. They have to plan their production and investments for capacity addition. They will all do that optimally with clear focus to save the price. Therefore, the steel industry needs to identify the right strategic move here.
?The author is an independent strategy consultant, Steel and Natural Resources