Good Time Ahead As Steel Arena To Witness Rising Prices Till Q203

Updated: Dec 23 2002, 05:30am hrs
The worst for the steel industry globally was over last year. The industry has not really looked back since then and continues to move ahead for the best of the time in the recent period. This has been a year to remember: not too many such have come since the mid nineties. Unlike the preceding years, it was one of consolidation, strength and hope for the steel makers all around the world.

The year 2002 was a year that saw prices taking upturn with global consumption up to comfortable levels. So depressing were the conditions in the global steel mart around the turn of 2001 that the prices of, say HR coils, rested at only about $170 per tonne in the international market. Today, these are sold at as much as $300 per tonne. What brought about this dramatic turnaround is fairly well known by now.

The China factor played a big role. The huge increases in Chinese appetite for steel was a strong factor balancing the global market. The countrys imports are expected to touch 30 million tonne this year. This is when her own production grew by as much as 25 per cent. The rest of the world was balanced with many forces in play. Major among them were significant consumption demand growth in South East, East and South Asia and notably in the CIS.

The high own consumption of steel in the case of the desperate to sell CIS countries reduced the pricing pressure on the rest of the global players to a large extent. The mills there were largely responsible for the price wars.

What is not often talked about while discussing the catastrophic price wars is the role of the liquidity position of the steel companies. The banks and the financial institutions (FIs) have for long taken it easy on the steel companies all over the world helping them out with a lot of funds. These funds instead of pulling them out of the immediate trouble pushed them into a war to retain market share with suicidal pricing. In competition, many developed the killer instincts, only to be killed in the process!

Both the industry and the banks are wiser today. The fight for the market share cannot be taken too far. So, there is a price rise today as well as a notable stability in the market at a time when the demand and supply balance in the market was no different from that in some of the past years when the prices even crashed.

In fact, price recovery had its origin in the US market. The safeguard proceedings and the tough talks of the US administration brought imports into the country down - even though for a short while. In anticipation of import curbs, the US mills started calling the shots and higher prices and the panic driven users booked more than they needed and that too at the asking rates.

The US HR coils prices shot up from a dismal $215 per short ton in December 2001 to a high of $380 by the middle of 2002. The only major domestic local factor responsible for this was the large number of steel mills filing bankruptcy suits in the face of hostile banks.

The year 2002 ends with two big question marks: One, Where from now when imports are back at the original levels, mills are re-opening and as a result, output is also back at last years level

Two, is the US market so strong to retain the current level of prices (say $315 per short ton for HR coils) that is higher by global standards

If the US prices drop under local pressure, the global steel prices may get hit under US pressure, although there is lttle to show any close correspondence between the US and the world prices.

Most experts expected the steel prices to weaken in the last quarter 2002. It is routine also. But, the expert opinion was based on the huge increases in steel production (at about 5.7 per cent till October) estimated by many to be above the rate of consumption demand growth. But, nothing of the sort happened and the fourth quarter prices remained strong.

The first quarter 2003 contracts have also exhibited substantial strength. At this rate, one can expect the prices to rise reasonably for the second quarter deliveries. It is seasonal as well.

Come September, the big picture will be clear: whether the steel industry is going to continue with this joy ride or will head back soon to another crisis point.

The steel experts and the governments in many major steel producing nations have put the blame for each of the steel crises on the excess capacity in the industry lying scattered all over the world. The problem of excess capacity is not unique to the steel industry alone. Almost every industry faces similar problems and some of the new economy industries face it far more than in steel manufacturing. The exact size of the excess capacity in steel not only is unknown literally but the whole concept itself remains far from satisfactory.

There is one small question to those who believe in this framework of thinking. If there is so much of excess capacity (some put it at above 200 million tonne), where have all that gone now when the steel prices have zoomed to highly profitable levels and have remained there for such a long time

If the understanding of excess capacity is shifting to one that is kept alive with external support, the prime focus of those addressing this big issue should be that support line itself. These support lines are complex in nature - have their past as well the present - and exist in different countries in different forms. The net effect of those may be the same for all.

The world will perhaps debate these issues for some more time to come even though the decades of discussions on this have not yielded anything. In short, the coming year holds good promises till the middle of it.

Have a good time, till then at least!

(The author is Chief Economist with the Economic Research Unit, Ministry of Steel. Views expressed are personal)