What has been happening in the world of steel around reaffirms the fact that the steel industry’s migration from high cost developed nations to low cost developing nations will be further accelerated. It is very clear from the developments in the last six months or so that steel output cuts have been maximum in the US, Japan and the EU, while the same have been either non-existent or minor in the case of the developing nations.
As the global economic prospects seem to be turning worse in the early months of 2009, the steel industry’s concerns are naturally increasing. The 24% drop in steel output in January worldwide is certainly worrisome. If the monthly steel production remains more or less at this level, the year 2009 may end up losing up to 250 million tonne of crude steel output from the previous year’s level if there are no changes in the conditions of the world market. Even if one takes the most optimistic scenario, the outlook for the year does not look good and the steel production may drop by at least 120 million tonne. Sounds frightening.
With recession looming large across the globe, developing nations will have the advantage in being able to get state-of-the-art technologies cheap. This will further shrink the technology gap with the West, which has so far helped steel makers in developed nations to retain their market share. It will not be surprising to see the European flat products market being flooded by cheaper quality steel produced in countries such as China or India. This is an opportunity amidst one of the most difficult times in the world of steel, the steel makers in countries like India cannot let go. While China has enormous capability to raise capacity and respond very quickly to emerging opportunities, their mills will continue to be burdened with iron ore disadvantage.
The Indian steel market is showing signs of a recovery. But, this may not be taken as a stable reversal of the trend signalling the end of the crisis. What is a matter of worry for Indian steel makers today is not the drop in consumption demand for steel bearing goods, but, the negative sentiments around that will hold down the investment sentiment, making it difficult to realise potential growth. There is nothing to be proud of the fact that that Indian steel production growth is still positive and respectable when the same has fallen apart elsewhere. This may be a statistical illusion. Also, given the nature of the Indian economy, one fears the trouble in the domestic market to erupt only with a lag. Therefore, investment plans need not be based on immediate prospects in the local market. It is time the industry takes a long-term strategic view of growth in the international context.
However, this does not mean that Indian steel makers should start shopping assets of the weak or dying steel makers in the West. Many lessons have already been learnt. There is no need for more of them.
It is also feared that the deepening of the crisis will lead to increased protectionism in the West. Possibly yes, but, this potential problem need not be excessively extrapolated based on past experiences. In fact, protectionism is likely to be spotted more in developing nations.
The days for the developed world of living on the savings made in the developing world are numbered. The current crisis has shown that the stability and safety of the financial system in the West is a myth. It is better to keep one’s own money closer home than let someone smarter take it away.
?The author is a strategy consultant and the views expressed are personal