A drop in China?s steel production growth rate to 4.3% should not immediately be seen as the trend for the days to come. If so, the country?s exports will drop and world prices will have another reason to rise. Seasonal increases have come in. There will be one more round of that once the iron ore and coal price contracts are over with their expected hefty increases. Most steel makers will keep smiling even with the raw materials price hikes. If there is any favourable factor, real or speculative, proving another chance to raise prices, they will have a bonus. The point is, where are the market forces in steel or the competition?
Steel prices are rising at a time when the queue for it is shortening. The adverse impact of a US subprime crisis-led global recession on steel demand is real. One should be prepared to face a major drop in steel demand at a global level and also in India.
Iron ore prices are set to rise by at least 30%. There are forecasts of up to 50%. The higher range has been justified by analysts seeing the current spot price premia on the world market. Coking coal prices may also reach $140 per tonne from the below a 100 level currently. While the mining companies can talk about supply constraints and inability to supply these minerals to all in the queue (their costs are not up correspondingly!), why are the steel makers lining up and accepting any price? It is because, they are in a position to pass the extra costs onto the steel consumers. There is no long queue out here everywhere. The steel consumers have not been able to pass the extra burdens onto their customers. One may not have seen the prices of automobiles, appliances etc moving up in the same proportion. If the housing costs have moved up, it is mainly due to land prices. Where is then the strength of the steel industry today?
The steel industry is consolidated and globalised. At one level, the non-Chinese industry is taking advantage of high costs of Chinese steel production. The impact of global consolidation is everywhere to be seen. If a couple of behemoths manage to raise prices or hold on to that even in an adverse situation, the rest of the industry follows. The steel industry, which is running after iron ore or coal mines to save costs and raise their profitability, should have made more efforts to raise its steel production capacity, invest on infrastructure to improve supply of raw materials to the industry, streamlined logistics. If one looks at the last few years of the steel boom, where do you see capacity increase outside China? Raw materials have been an issue. But, have you seen any serious dent in the industry?s profit on that account, again outside China?
The steel industry will face several competition issues, globally, as also in India.
The author is Strategy Consultant: Steel, Minerals, and Coal
