Steel prices have reached a record high in the global market. So have the raw materials such as steel scrap, coking coal and iron ore. Apart from the well known shortages, which lie at the root of the current strength in prices worldwide, the steel market has been driven now also by speculation. Shortages are not widespread and much of what is being seen can be artificial. It is not that steel is being locked up in stockyards to create artificial scarcity, but a perception is being created, deliberately as also unconsciously, that there is no iron ore steel to find or for that matter the raw materials to produce them. Marginal shortages have led to exaggerated speculative responses and then to a massive paranoia within the user industries, especially construction and capital goods. One cannot exactly say where the market is heading at this moment, but there are concerns on its foreseen path.
Steel and raw materials prices at current levels are not sustainable, especially when there is a fear of global recession hitting both the developed as also developing world fairly hard. The full impact of the high oil prices and scarcity of food are yet to be felt in the consumption decisions of the global population at large.
While the steel market continues to remain strong fuelled by the investment decisions taken in the past or the ongoing projects across the world and well supported by continued strong growth in China and the Middle East, it will be difficult to believe that the trend will continue the same way for even a year more. The natural outcome of it will be a weakening of the steel mart, which in turn will bring down the current volatility in the input prices. Spot prices of coal and iron ore will also be affected.
Recently, there are reports from India as also from a few other countries that steel prices have started softening. Globally, this can be more than the expected seasonal drop. In India, if well-published market reports are to be trusted, the drop in steel prices is more than what the fiscal measures taken by the government supported.
The inability of the sponge iron producers to raise prices sufficiently at a time when the global steel scrap prices have crossed $720-750 per tonne is a signal the analysts should not ignore. While this can be an encouraging note for steel buyers, there are many more issues to take note of.
Steelmakers may see a drop in demand on account of a global economic slowdown. They may turn a little more flexible and try accommodating buyers? concerns more. If this process starts at any level, with lowering of prices, the speculative forces that are playing havoc will lose steam and the direction of the same will turn 180 degrees. The immediate impact of this will be on steel melting scrap and spot prices of coking coal and iron ore.
What will happen to coking coal and iron ore contract prices? Nothing will change and steelmakers will cite these two prices to justify a higher price of steel. They will gain in the next year?s contract, contrary to several forecasts of even higher commodity prices in the coming year.
But again, much will depend on the global economic strength and if current experiences are to be counted, steel prices will be governed from now on more by the market demand and supply than by raw materials.
However, assuming that steelmakers globally will be pushed to accept the terms of the market will be expecting too much. The steel market worldwide is no longer competitive. With consolidation, the industry has gained sufficient pricing power. The industry will cut production if necessary to save prices. But, there are limits to accepting lower capacity utilisation. This will be determined by how bad is the drop in steel demand.
As long as the global steel demand outside of China remains positive, one cannot expect a significant price cut, if there is any at all. But, an entry into the negative zone of growth may trigger a panic even among the global steel behemoths. They will be concerned collectively about loss of market on account of high prices. To be sure, it is only when steelmakers are forced to chase customers that the prices will stabilise. Such conditions in the global market are not immediately foreseen. But, if prices remain this high, irrespective of the costs to produce them, the customers will drive away. It will be over-optimistic to believe that nothing of the sort that happened in the early years of the decade will not recur.
Much of the policy initiatives in steel need a rethink.
The writer is an independent strategy consultant, steel & natural resources
