The fall in steel demand in China and the end of restocking are playing havoc in the global steel mart. If the current trends continue, the prices of HR coils may drop to as low as $350 a tonne by November. The story will not be very much different for other products as well.
In fact, the fall was not unexpected. The recovery from the bottom they reached was more due to frenetic restocking at the buyers? end in the expectation that the steel prices were all set to rise sharply with the global economic recession ending its course. In the mean time, humongous combined efforts of various national governments ensured that the economies are saved from a potential disaster and that confidence is back to complete ongoing capital expenditures and take up new ones.
Steel consumption levels were sustained in China with gigantic stimulus measures. The country already had a huge excess capacity in the industry, apart from the fact that it was exporting a net 55 million tonne of steel before the onset of the global crisis. The rise in domestic demand was absorbed through the export volumes diverted to the domestic market and to some extent from incremental production.
But, the production increases lacked co-ordination and the steel makers there did not see the potential impact from the loss of merchandise exports which reduced the indirect exports of steel, embedded in export products. They also did not accurately read the potential slowdown in industrial capacity creation directly linked to the exports market. Even the domestic demand increases were more for specific products such as railway track materials, wire rods and sections and were not across the board. Against this, the new capacities brought in were significantly in flat products such as HR coils, plates, CR coils etc..
Further, as investment projects in the real estates lost banks? support, steel demand met with a significant setback. As of now, although the Chinese demand has not really fallen so much in a broader sense in the aggregate, it is the increase in production, in far excess of demand, that has sent shock waves round the world market.
The Chinese origin steel is headed to all the important markets in the world at hugely competitive prices. At low coal and iron ore prices they are still profitable and have the capacity to bring down prices further without making any loss.
The rise in steel demand in other markets were also significant, especially when compared to the bottom they touched in December or January, which sent the right signal to the industry too to raise production and prices. But, the speculative restocking at the users? end was extended too far. The perception of the potential rise in real demand for steel, especially flat products, was exaggerated. The response of the steel industry in fact was worse than this. The first sign of an upturn brought capacity back to production very quickly. Individually each was taking the right approach but collectively going wrong. There was not enough space for all to survive and thrive.
The HR coils prices dropped from about $650 per tonne level to the lows of $450 already in the world market. The US dollar denominated prices may also be seen considering the fact that the currency has depreciated almost across the board. The difficulties here are that even if the global demand is sustained at unchanged levels, the capacities brought in to production will not be withdrawn immediately. At low prices of coking coal, scrap and iron ore, the HR coils can still be produced at $250-300 a tonne by many efficient mills around the world and at sub $400 by almost all.
The steel industry globally will have to wait till demand increases substantially. This wait can be fairly long. The change of fortunes in steel witnessed will certainly have an impact on the capex planned in many countries including India.