The sharp fall in steel prices with the prevailing recessionary conditions in steel has raised questions on the prospects of India’s steel industry. Most of it is reflected on the performance of the steel stocks in the market. Even if one discounts for the negative speculation and undue and exaggerated fear that is pulling all stocks down, the steel company stocks have been hit by specific and genuine concerns.
For example, Tata Steel, the least cost steel maker in India, is faced with a significant challenge with Corus. The company has already announced its plan to cut production in Europe by 20%. They have a larger matter related to the pension funds and liabilities thereon.
Many steel producers have acquired steel making, processing or mining assets in the past few years. All these assets have lost value today with the downswing in the market. The current reality proves that these assets were bought expensive. Their fate will depend on how long this recession will continue and what will be the long-term growth path of the industry. It is well understood that these assets were not gobbled up to take advantage of short-term conditions, but, even on a longer term considerations, many of the acquisitions may prove burdensome to Indian steel companies.
Global steel consumption can fall in absolute terms in the next couple of years. Whether it is in the housing industry or any other industry, substantial surplus capacity has already been created. These segments had shown good prospects at some point in time and for some reason or the other.
The conditions in China are terrible. The market seems to have collapsed. Steel production has fallen sharply. No one knows today how far China will go down this way? Ports are packed with iron ore with no buyers despite the fact that imports from India and Brazil have fallen sharply. If China’s annual steel consumption falls by about 50-60 million tonne in 2009 and production by the same measure, it will have a huge impact on global steel and related industries. Much of the capacity enhancement in iron ore, coal or shipping globally was based on the strong growth prospects of the Chinese economy.
Today, iron ore prices on the spot market have fallen to below $65 level from the peak of about $148 or so. The shipping rate for iron ore from Brazil to China has dropped from over a $90 to $12 a tonne now. The rates barely cover the costs of fuel and port charges. This will put an end to much of the euphoria over the prospects of the shipbuilding industry and the steel plates to be used for that. Global plate mill capacities can run into a huge surplus. One can gauge from it what the fate ahead is for the new plate mill capacities.
The Indian government has acted strongly to raise the supply of credits for business. This can help local business get over some immediate cash crunch and lower the interest rate in the informal market. But, where are those projects or clients that the banks can support confidently? The world of steel is heading back to the days of the late nineties and early this decade. The government itself will face a fiscal crisis with lower tax revenue and higher expenditure resultant from ambitious and benevolent projects. The government will pay more to its employees, absorb the impact of farm loan waivers and rural employment guarantees. One wishes there will be enough left after that for infrastructure and other steel intensive projects!
?The author is independent strategy consultant, Steel and Natural Resources