Steel prices have started to decline in the world markets. Long products have lost more than flats. While drop in prices in the case of long products is universal, flat products continue to have spots with trends in contrast. There are many reasons to for this and most of them have been identified in the last few months.
Despite the remarkable recovery in the global economy, uncertainty over its future persists. The financial crisis is once again showing its face in Europe and with China trying to hold down the pace of investment growth with credit squeeze, steel industry that rode on a speculative boom is faced with a credible setback.
While problems in Europe are likely to hit the steel market locally, major exporters to the region, such as the CIS nations and Turkey, will have to divert a lot of steel to markets elsewhere. This will result in increased competition in the relatively strong and growing markets and bring prices under pressure.
This problem is not so large when taken in isolation, but had been compounded with Chinese demand trending down with the government restricting credit flow into the economy that is considered overheated by its policy planners.
The credit squeeze will hit the speculative real estate sector. It will also slow down industrial capacity expansion for the time being. It will reduce the money invested in the commodity exchanges and make things difficult for traders who are holding stocks currently. So, the government policy will hit real investment as also cut speculation.
This means while real demand will be down with the speculative demand added to it, the total impact will be quite strong. If prices of steel or other commodities slip, panic may start, leading to a strong synchronised fall in steel demand and prices.
But, at the same time, steel mills will use all their might to resist the price fall. They are paying high for iron ore and coking coal. They cannot afford to let prices drop to the costs line. It is unlikely that coking coal prices will fall from the current level. In fact, the current spot prices of coking coal, at $250-275 per tonne on FoB basis, is far higher than the $200 per tonne currently contracted.
The supply situation continues to remain grim at the moment and unless the Chinese mills withdraw from the Australian coking coal market in a significant way, the pricing power of the miners will remain strong.
The dynamics of the regionally fragmented global steel markets will nevertheless provide limited support to steel prices. The local conditions of the markets, steel scrap prices, the strength of the trading currencies and ocean freight costs will provide widely varying conditions for the steel industry?s profitability and pricing power.
Some such factors will certainly create favourable conditions for steel makers. But, in the larger context of the global mart, such spots of strength are of little consequence.
Most of the developed major steel consuming nations have regained much of the ground they lost in the midst of recession. But, they may not go much further. Therefore, the global steel consumption recovery to the level of 2007 will not be so easy and will depend on the growth prospects in China which is the subject matter of great interest today.
But, even if the Chinese government goes after speculative investment in fixed assets, their interests in the context of steel industry should be to regain their position as buyers of commodities rather than becoming passive and helpless price takers.
Their concern should be their own production capacity and competition to secure raw materials within the industry which has led to irrational pricing for raw materials in the world market.
If the Chinese government follows a strong policy to curb steel exports, the country?s demand for both iron ore and coking coal will fall. They will pay less for them. If Chinese steel is not so visible in the world market, prices can still hold relatively strong.
?(Views expressed in the article are personal)