The news surrounding steel continues to be bad despite claims of marginal recovery in the price of HR coils in China, and may be, in some other countries. In fact, the worst for the industry globally is yet to arrive. The order books of major construction and capital goods companies may remain comfortable for another three to four years at the most. The thinning down of the stream of new orders will be felt gradually and will perhaps hit steel makers very hard in 2009 and 2010, if not beyond that.
It is only the confidence of the consumers and their comfort levels in respect of future earnings, such as stability in employment and entrepreneurial prospects that can work for an industrial recovery and strengthen the investment scenario. The response of the private businesses to the current financial meltdown in general has been correct in the domain of their own individual businesses. But, collectively they have made a mistake and are paving the way for a protracted recovery and more painful conditions for themselves.
The steel industry today is faced with the crisis of seeing a lack of confidence in both, investment and consumption. Consumption demand growth in the economy could be sustained further only if the fruits of economic growth had reached all classes of people. If the demand growth was based on the consumption decisions of only the rich or the upper strata of the income groups, it was bound to fall soon. After all, those who have money have acquired most of the assets they desired when the time was good. Today, they are mostly satiated. With the recession hitting the poor and the middle classes with sources of income disappearing with job cuts, consumer confidence is all set to fall sharply. There is no sign of an improvement here.
The industry, including steel, panicked beyond reason and forgot the great days of massive profits they made in the past so many years. Every industry has to remain prepared for a cyclical downturn in business. One has to remain prepared always to bring back personal or private assets built up during goods days into circulation to keep the current business going. Total dependency on bank credit for business expansion or sustenance is unacceptable and it is evident the businesses are falling with the credit squeeze far beyond what should have happened. If businesses go into the narrow contours defined by the availability of bank credits, there are no hopes for an immediate economic recovery. The stimulus package announced by the government has very little leverage to deliver in these conditions.
The steel industry will be back on to the path what we saw beginning the seventies. There will be widespread demand shrinkage in the developed world. Over a period of about 10 years, steel demand in the developed nations can be expected to shrink by 25-30% from the peak levels in 2007. It will happen in China as well. If demand falls globally by such an extent, it will not be very far away when the world will start calling the steel industry a sunset industry. Trade conflicts will mar global flows of materials and the resultant inefficiencies will hurt productivity growth and economic prosperity.
?The author is independent strategy consultant, steel and natural resources
