Posted on 24 Nov 2015
Steel prices react to Chinese exports deluging world market
Steelmakers all over the world are facing a
crisis of low demand and very low prices, which leave either slender or
no margin for producers. Let us consider the case of ArcelorMittal, the
world's largest steel producer. In the third quarter of 2015, its
year-on-year sales dropped to $16 billion from $20 billion, causing a
net loss of $711 million against a profit of $22 million.
This is in spite of the European part of the company, represented by
erstwhile Arcelor, and the group's US and Canadian operations are mostly
about products at top end of value chain requiring application of
technology that is a close preserve of a few. If this is the condition
of an industry leader then the torrid weather faced by those making
commodity steel as in India is easily understandable. We have seen quite
a few highly disquieting working of Indian steelmakers - both in the
public and private sectors - in the September-ended quarter.
The global steel crisis is largely due to an
overcapacity estimated at 600 million tonnes (mt) by the rich country
club the Organisation for Economic Cooperation and Development (OECD).
Worryingly for the global market, half of that excess capacity rests in
China, which has its compulsions to make a lot more steel than it needs.
How soon all that extra global capacity is going to go away depends on
two things: First, China's progress in scrapping capacity that is
uneconomic and environment damaging. It is common knowledge that the
provincial governments in the country remain resistant to mill closure
to protect jobs and score province-centred growth often to the point of
angering Beijing.
What is obvious is, the provinces are providing large dollops of subsidy
to sustain steel production. Metal Bulletin says Chinese companies are
found exporting steel regularly at prices 10 per cent below what they
charge locally. This, according to The Economist , is the textbook
definition of dumping.
No wonder, then, Chinese steel products are from time-to-time attracting
retaliatory duties and on occasions, anti-dumping imposts, too, in
various parts of the world. In September, India put a 20 per cent
safeguard duty on imports of hot-rolled flat steel. The growing arrival
of foreign-origin steel (not only from China) taking advantage of a
liberal import duty regime here is cornering a significant share of
Indian steel demand at local producers' expense.
Second, world economic growth, particularly in emerging nations, will
have to be much stronger for better use of steel capacity. But steel
demand in China, which fell to 711 mt in 2014, will further contract 3.5
per cent this year and then by another two per cent in 2016. But
Chinese steel production in the first nine months of 2015 was down only
2.1 per cent to 609 mt.
The implication of trends in Chinese demand and production is disturbing
for other steel producing countries. China's record steel export of
11.5 mt in September is a pointer to the country finishing 2015 with
overseas sale of 110 mt against last year's 94 mt. The country is,
therefore, set to export steel this year equal to what Japan, the
world's second largest producer, makes annually.
Low demand and surplus capacity have resulted in global steel capacity
use sinking to 68-69 per cent. In the context of the industry's high
fixed costs, mills should run at least at 80 per cent capacity to be
able to use raw materials efficiently and retain pricing power. It's no
surprise, then, that in recent periods, the fall in steel prices has
been sharper than in raw materials, particularly iron ore. So the spread
that steel producers are to earn is squeezed.
From ArcelorMittal to Tata Steel Europe, every steelmaker will,
therefore, be heard complaining about damage to steel prices being
caused by China. But producers such as Posco and Nippon Steel with large
proportions of high-end steel in their portfolios requiring the use of
very advanced technologies are not faring as badly as commodity steel
makers.
Is not there a lesson for major Indian steelmakers here? They should
ideally make attempts to rope in steel companies in Japan and South
Korea as joint venture partners with a flexible approach to equity
ownership and sharing of management control to make electrical and high
auto grade steels for which we are import-dependent. As we chase an
ambitious capacity of 300 mt in another 10 years, a focus area should
ideally be to build competence to make steels for which we are
technology-deficient.
