Optimism about the recovery of the global economy has been overhyped. The truth is well concealed amidst the avalanche of news pouring in from all over the world and relating to a very large number of industries and economy segments which were in deep trouble a year ago.
Although at this stage, the most common position is that the worst is perhaps over, indicating a possible growth from this point, the views on the steel industry recovery have been drawn excessively to the positive side, ignoring the fact that downside risks cannot be fully written off at this point. The recovery has not been assessed well in most cases and not seen in the larger context of the global economic development.
Steel prices are sharply on decline all over the world in the last few weeks. The weakness is no longer confined only to the Chinese market. The demand side of the story is fairly weak amidst excess production capacity and supplies everywhere. It has not been very long since the steel makers globally have started bringing their closed facilities back into operation in response to the rising prices in the middle of the year. Today, if the mills attempt to maximise utilisation of their capacities, the steel prices will crash to the depth they reached earlier this year. It is a strategic move, the steel industry collectively or otherwise will have to make to cut prices or save prices by cutting production instead, bearing in the process a heavy burden of underutilised capacity. Although operating at lower capacity is easier today, thanks to technology, the threat of losing out on market share and customers and getting caught on a low growth syndrome will not be an acceptable policy option for many steel makers who continue to look at growth prospects.
The conditions in India are no different if the retail prices are any indication. There are reports of HR coils (of commercial re-rolling quality) being booked at c&f prices as low as $495 per tonne. This is about two weeks ago. There has been further deterioration in the pricing conditions since then. The flat products prices were maintained high with phenomenal growth in the passenger car and consumer durables segments. Looking ahead, there are no more government pay arrears to come, nor there are elections to be held immediately. Therefore, demand for passenger cars and other utility vehicles will drop. Also, even if the Indian steel makers manage to ward off the import competition by correspondingly reducing their prices, their accounts will take a big knock.
The stock market is no reflection of the actual conditions in the economy. Once the common man starts losing money, the consumer and investment confidence will take a dip once more. Today, the Indian stock market is being benefitted by a commonly accepted perception that the Indian economy remains fundamentally strong weathering the global meltdown and that it is still the best place to put the money. If this is the general perception, there is an added worry about the real conditions of the global economy. That means, investor confidence remains low globally and in the days ahead, the country?s economy will not have much to reap from a potential global recovery. At current prices, most of the India?s backbone stocks are overvalued. Their current levels are artificially maintained and are bound to fall.
If the country?s GDP growth rate drops to about 6% and the industrial growth rate also remains in that range, steel demand growth will perhaps drop to about 5-5.5%. Steel industry?s massive potential will be realised only when the economic growth rises above 8% and industry grows at least by 10% every year. A 5-5.5% annual growth rate in steel consumption demand is not bad by global standards ( minus China ) but way below expectations. The Indian steel capacity addition plans will receive an incredible setback.