Global recession will hit steel demand

Written by AS Firoz | Updated: Jan 28 2008, 05:29am hrs
The global stock market crash and the ongoing turmoil are indication of a wide spread and larger than expected economic slowdown. There is already a consensus among experts that the world will see an economic slowdown. What is being debated currently is what will be the extent of this. There are no doubts also that a global economic recession will hit the steel industry. Here also, again, one trying to assess only the magnitude of this impact. More importantly, what one is worried about how steel price behave in the face of a slowdown in demand. The commonly accepted assessment in the expert circle is that steel prices will get flattened by the middle of the year. Interestingly, when the fear of a significant global recession is gaining credence, the steel prices have been on an upward spiral with the

HR coils trading at above $700 per tonne. Even the billet prices are on a historic high - reportedly at above $650 per tonne on an fob basis. While a part of that is explained by seasonal increases and some expectation in regards to iron ore and coal prices, the current prices are based not on the future expectation, but, past experiences.

However, the current price levels notwithstanding, given the conditions in the global economy today and the situation forecast, one believes that demand for steel will gradually drop over the months and more towards the end of this year. However, this itself may not reduce prices significantly as the industry will see substantial cost increases on account of both iron ore and coking coal. The iron ore miners are reportedly asking for a 55% hike for the 2008 contract which the Chinese steel makers are not ready to accept. The coking coal prices are certainly to see a rise by about 50%. Given the cost structure in Chinas steel industry, the dominant players today, it may not be possible to absorb all the cost increases. Further, Chinese steel production growth rate is falling and in 2008, they are unlikely to add much in terms of both capacity and production. If the Chinese economic growth continues in the same way for another year, their incremental consumption will be more than the the output they will add. This means their net exports will drop. What is important to note is that the steel prices globally could be maintained at extraordinary levels last year despite the fact that China exported nearly 72.5 million tonne of exports. But, what is a matter of concern also is that the Chinese government is planning to bring in curbs toinvestment in fixed assets and importantly housing in that.

The Chinas economy, so much dependent on exports to the US, may be hit with the US led world recession. This may further cause some production slowdown and postponement of investment on new industrial capacity.

But, one will have to wait to reach such a conclusion. In fact, the recession may hit other competing, but higher cost economies such as India, more in the world merchandise trade leaving China relatively unaffectedin the process raising their share in global trade at the end of the day. Therefore, the Chinese steel consumption demand will not be significantly affected. In fact, the industry expects consumption to grow by 10-12% in 2008.

The global recession will hit the services sector hard. The Indian services industries are feeling the pinch of that already. This will lead to slowdown in the demand for automobiles and consumer durables leaving some impact on the demand for flat products. Steel makers are one lot globally. They will sacrifice production to keep prices alive and kicking. A combination of a fall in income and high steel prices may have more serious implications on the economies such as Indias currently on an investment drive than when steel prices respond to market demand naturally.

The author is Strategy Consultant: Steel, Minerals, and Coal