The Hindu Business Line : Steel industry: To continue shining in 2006

WITH the given cyclic nature of the world steel market and the tendency of steel prices to touch peaks and bottoms at will, no year is a surprise, in real terms, for steel watchers. The New Year 2006 too comes on the heels of a mixed 2005. Starting off with a historically high price line, 2005 closed with an overall downward correction of 30 per cent. For instance, the Europe export price, which was ruling at a high of $582 per tonne at the beginning of the year, fell 32 per cent to $393 by end-2005.

This happened despite the fact that real consumption remained relatively strong through most of the year. The factor that played the crucial role in deciding the demand and supply mismatch, or mix-match, was the `de-stocking' of huge quantities of piled-up inventory lying with the service centres and end-users at the beginning of 2005.

This de-stocking of inventories deflected a significant portion of demand and did not let it reach the steel producers in full.

In the European markets, for instance, the growth in apparent consumption of steel went down from 3.4 per cent in Q1-04 to -6.1 per cent in Q3-05 whereas real consumption growth showed figures of 3.7 per cent and 0.7 per cent in Q1-04 and Q3-05 respectively, showing that the decline in apparent demand was not real.

China too played a major role, virtually driving global steel production. Its crude steel output rose 25.5 per cent, to 317.7 million tonnes in the first 11 months of 2005, pushing world steel production up by 6.1 per cent despite rest of the world registering a fall of 0.9 per cent in production.

The continued increase in output in China has changed the demand-supply equation in the global and Chinese steel industries. From being a net importer of steel till 2004, China exported 23.34 mt of steel (including billets), against imports of 23.03 mt, making it a net exporter.

These two major factors put together resulted in downward price pressures in the industry. However, as 2005 came to an end, new order bookings started picking up due to the de-stocking activity being over in the US and European markets.

According to Metal Service Centre Institute, a renowned steel journal, the stockists' inventories in the US are at their lowest in more than seven years.

In the Asian markets too, the de-stocking activity has almost reached its end, signalling the arrival of a period of overall price stability. The year 2006 starts on a healthy and vibrant note as the global economy is projected to grow at 4.3 per cent (IMF estimate), virtually the same rate of growth as last year.

China, the country driving world steel demand, is unlikely to see a sudden slowdown in either its GDP or industrial production, which are currently growing at a scorching pace of 9.4 per cent and 16.1 per cent per annum respectively. The US economy is expected to grow reasonably well at 3.3 per cent, which, although slightly less than the 3.5 per cent expected for the current year, is in itself a huge growth considering the size of the economy. Europe and Japan along with Asia too are showing robust growth. The rebuilding activities in the aftermath of the Iraq war, and the Hurricane Katrina and the tsunami are likely to further push up the demand for steel in the world.

The party on the demand side gets even better as the International Iron and Steel Institute (IISI) has projected a growth of 4-5 per cent in steel demand in 2006 against an estimated growth of 3 per cent in 2005. This projected rate of growth is well above the historical average annual growth rate of 3.6 per cent experienced by the steel industry.

The strong growth continues to come from China, West Asia, India and South America. In the case of India too, the strong economic and manufacturing growth of 8.1 per cent and 9 per cent respectively during April-September 2005 spell hope for the domestic steel industry. This along with strong performances being witnessed in various user segments, such as capital goods and automobiles, brings the global party home for the Indian steel producers.

The medium- and long-term outlook for the Indian steel sector remains positive, with a lot expected to happen on the capacity addition front in the market. On the supply-side too there are healthy signs.

In China, where a third of the steel producers are currently operating below average cost of production, the producers are expected to cut down growth in production. Therefore, the fear of Chinese overproduction entering the international markets is somewhat receding, giving further stability to prices.

However, as behind every growth spurt, there is a note of caution, there is one here too. The Chinese Government's ability to control the molten hot Chinese steel sector and to curtail surging steel capacities still remains a billion dollar question.

In the event of Chinese Government failing to control the addition of capacities and growth in production, the additional supply is most likely to reach the international market. This event has the potential to cause considerable heartburn to the global steel industry. Also, though the high oil prices, rising interest rates and increasing imbalances in the US market have so far not shown any significant downward impact on the strong global growth, they still remain high risk factors having the potential to affect global economic growth and thereby global steel demand.

Barring these factors, the overall near outlook for the global steel industry remains positive in the year 2006. The industry is likely to see a normal and healthy year with prices remaining stable.

(The author, who formerly headed Rashtriya Ispat Nigam and Essar Steel, is Director, Essar Group. His views are personal.)