Posted on 17 Feb 2016
Falling prices leave steel companies deep in the red
The most disturbing feature of the world steel
industry, which gives a good insight into the state of global economy,
in 2015 was prices falling to their lowest in a decade. That hot-rolled
coil prices have risen by about a 10th so far this year brings little
relief to steelmakers.
Near-term steel outlook remains uninspiring. The disturbing phenomenon
for which China, which accounts for nearly half of global steel
production, is largely responsible is due to supply staying in excess of
what the market could absorb.
The 2.8 per cent contraction in world steel output at 1.62 billion
tonnes last year that happened for the first time since 2009 was not
enough to stir the market as industrial production and construction
activities in major and emerging economies remained lacklustre.
To accentuate the problem, China in spite of producing 2.3 per cent less
steel at 803.8 million tonnes (mt) became an aggressive seller in the
world market in the face of waning domestic demand particularly from
construction and housing sectors.
Last year saw China's steel exports rising 20 per cent to 112.4 mt
provoking many countries hosting bruised steel industries to invoke
trade defences from minimum imports price (MIP) to anti-dumping duty.
Incidentally, China's exports were 105.2 mt output in Japan, where
production fell 5 per cent.
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No wonder, the difficult steel market inflicted a
record loss of $7.9 billion on ArcelorMittal, the world's largest steel
producer with manufacturing presence in five continents. The loss
includes impairment charges of $4.8 billion mostly on mining assets that
suffered value erosion.
The Lex column in Financial Times says: "Given that losses have eaten
away the company's equity over five years, bolstering its balance sheet
is sensible." The reference is to ArcelorMittal's announcement of a $3
billion rights equity issue in which the Mittal family, which has a 37.4
per cent stake in the company, will fully participate.
Things for ArcelorMittal are to get worse as guidance of $4.5 billion
earnings before interest, tax, depreciation and amortisation in 2016
will leave it in net loss for five years in a row. The company's shares
have received resounding thumbs down in the past year with the price
down 60 per cent.
Referring to the challenge China faces in restructuring its steel
industry to a "lower growth economy," chairman Lakshmi Mittal finds the
news of capacity closures in that country "somewhat" encouraging.
China has reportedly eliminated 95 mt capacity since 2010 and it might
dump another 150 mt capacity, mostly environment damaging small mills,
in the next five-to-seven years. That some restructuring is finally
happening, there is good news for every other steel-making country.
China is expected to make 2.2 per cent less steel in 2016 when local
demand, according to World Steel Association, is to shrink two per cent
on the back of a 3.5 per cent fall in 2015. Much global hope is resting
on the possibility of production fall reining in Chinese exports.
An Accenture official told Financial Times: "Were this to happen, the
modest demand growth increases forecast for the US, the EU (European
Union) and other markets should support operating rate increases and
somewhat higher prices." What, however, will limit steel price rises are
low prices of raw materials.
Goldman Sachs says in a report if Beijing's announced steel capacity
cutback plan resulting in production fall of up to 95 mt materialises,
that will be an additional pressure point for iron ore, which is
hovering around $40 a tonne. Mittal thinks there will be little material
change in steel situation in 2016 and this finds resonance among
steelmakers across the globe.
A combination of steadily falling prices and high imports sunk Indian
steel leaders from Tata Steel to JSW to SAIL to big losses in the third
quarter of 2015-16. In the first 10 months of 2015-16, steel consumption
here was up 4.2 per cent to 65.91 mt.
This would have called for some celebration hadn't imports during the
period risen 24.1 per cent to 9.3 mt. Hopefully, MIP ranging from $341
to $752 a tonne on 173 steel products will improve the steel scene here.
The industry has a debt burden of close to Rs 3 lakh crore.
In the industry's present condition, many of its constituents are not
able to service bank loans. Quite a few have already moved in the sick
bay and more are likely to join.
