There are reasons to believe that steel prices globally cannot be sustained at the current level. The real conditions of the market will not support them. The massive March to May surge in steel prices were caused by a panic reaction on the one hand resulting from the drop in steel output witnessed in February and the extremely well-orchestrated run of speculation that defied all economic logic and let prices go through the roof. A steel price increase of $400 per tonne or more was rationalised or justified by input cost hikes, coking coal and iron ore contract price increases mainly, which for the worst sufferer from it could not be more than $ 250 per tonne!
Much of what has been witnessed on the steel and raw materials market today is related to the continuous process of consolidation in these industries, helped by cheap and easily available global finances in the past, which again had originated from the savings of the millions of people in the developing world integrating into the global financial system, as they gained from improved productivity and new economic opportunities and a moderate standard of living. There are always reasons to examine in depth if the benefits from economies of scale as expected to be delivered from such consolidation have been passed on to the people at large, reflecting in lower real prices of steel.
It will not be easy to trace real economic or simple productivity gains resulting from most of the mergers and acquisitions in the world of steel. All are aimed at enhancing shareholders? value through profitability and efficiency gains attempted to be achieved through restructuring or rightsizing of businesses. A well-achieved consolidation may lead to higher profit for the company, but, not necessarily to meeting the growth challenges. Raising output to meet the growing world demand was not seen as the main object. In fact, there was no such outcome also visible. Lack of output growth from those who had the money and the sole strength to quickly engineer capacity growth through new projects resulted in supply falling short of demand continuously.
Mergers and acquisitions in steel and related raw materials globally came as a defensive tactic in the face of severe downturns in the industry in the past. These were driven further by the perception that steel, coal, and iron ore have no great future. It was also justified by the meager 1.5% annual average global growth achieved for two previous decades. But, the market was read wrong in the first place and then new strategic investment models were built to draw investment funds from all over the world, which made investment in consolidation more attractive than in fresh capacity creation.
?The author is independent strategy consultant, Steel and Natural Resources