The Hindu Business Line : Strong China demand to drive US steel

IT'S a million dollar question — what is the correct prognosis for the US economy? Despite conflicting views, including not so rosy forecasts by leading automobile industry consultants, steel's continuing price increase is now drawing fresh fuel.

"It is certainly the flavour of the month," said a top official for a steel manufacturer with considerable exports to the US. In November 2003, in a clear signal of reviving the steel industry's fortunes, the US had clamped a 32 per cent duty on scrap export. Only Japan has surplus scrap for export in Asia and given the limited supply of scrap amidst feverish Asian steel demand, buyers had turned to the US (the biggest source for scrap) where steel making was in a bearish phase.

But as domestic steel manufacturing made a comeback, scrap demand within the US hotted up, eventually leading to the export duty. American steel mills have similar levies in place since December 2003 for domestic sale of raw materials (from one US mill to another), HR being one of it. The surcharge for April supplies is in the region of $90-$100.

The surcharge is seen as an excuse by the US steel mills to wriggle out of long-term supply contracts because the current price trajectory points to future price realisations that could be better than previously contracted prices. The belief may not be incorrect, if HR price trends away from the US are also considered. Not long ago, HR had breached the $400-per tonne-mark and Russian HR is now straddling prices such as $510-$520 f.o.b.

Coke, a prime raw material driver in steel prices, also continues to be priced high. One trade query received on Wednesday in Mumbai was at $350 per tonne (and up another $20 today), source unclear but suspected to be American"We may be on our way to $600 in HR," the official said, pointing to the squeeze on global ship supply as well, there being a huge mismatch between fresh ship deliveries for the year and the slated increase in quantum of steel-related raw materials for movement. In fact, there is a worry that even commodities (herein those unrelated to the steel sector) affordably priced today, could be pushed into a price rise due to the scramble for vessels to transport globally.

Back to the US, the emergent steel demand is argued to be real despite the weaker US dollar. Housing and construction activity is cited, and alongside an observation that spending is occurring. "They are now passing on costs stemming from value addition to the market," the official said. Galvanised steel from India is claimed to find prices as high as $800 (the previous high was $620 in February/March 2003) giving rise to the need for caution on the volume front.

Though safe by a good margin, export at buoyant times must not invite anti-dumping duties in the US. Galvanised steel and pipes have been outside the ambit of such tariffs applicable at present to Indian HR and flat products export. But, the ongoing US steel consumption is not a case of demand correction but one of growth. "For the next 3-6 months, it will be a strong destination," the official said. China remains the steel industry's pet demand driver and the US as current favourite is yet only a bonus. "Chinese demand should continue strong into 2006-07," the official said.

However, if steel demand is tied to the fortunes of its consumers and the view on North American automobile sales matters in that context (besides being an indicator of economic well being), then the latter paints a contrasting picture. In its latest report, the UK-based consulting firm Autopolis, said North American car and truck sales, which have dropped for the last three years in a row, is expected to drop a further three per cent in 2004.

Worse, Autopolis says, "After this year's presidential election, in 2005, the firm expects a more serious decline." This is because interest rates will then have to go up, taxes will rise and the impact of the drop in the dollar's value will become more apparent. "In the US market, sales will fall from a peak 17.4 million vehicles a year in 2000 to a low of 14.9 million vehicles in 2005, before they begin to recover," it said, noting, vehicle production may not fall as steeply as it has dipped sharply already.

In the North American auto market, a return to peak level is seen only by 2009.