The Hindu Business Line : M&As test the mettle of steel industry

Major cross-border mergers and acquisitions such as Arcelor-Mittal and Tata Steel-Corus have put the steel industry in a tizzy. The Tata Steel-CSN battle for Corus had all the elements of a television soap opera, and indeed got primetime media attention. The world at large remained glued to the monitors, watching the proceedings for the impact on the global steel industry.

High consumption demand

The global steel industry is going through a phase of sustained high consumption demand, especially from China as also other developing countries that are on a high economic growth path. Analysts expect steel supplies to go up by 4 per cent, but the demand is projected to race ahead by more than 10 per cent in the next few months. The global demand is led by China and India which are on a robust growth phase.

Apart from being a major consumer, China is also a key producer of steel, clocking an output of around 350 million tonnes (m.t.) in 2005 that accounted for around 31 per cent of the world production of the metal. India has also reported positive growth rate of steel production especially in the last 15 years. However, the per capita consumption of steel in India is significantly low at 29 kg compared to the global average of 150 kg and the developed countries' 350 kg.

Considering India's growth rate and the way the Indian steel industry is waking up to the challenge of global competition, especially in the light of Tata Steel takeover of Corus, the country should improve its current position as the eighth largest producer of steel.

The largest overseas takeover by an Indian company, the combined Tata Steel-Corus entity will have a total capacity of about 24 million tonnes, catapulting it among the world's largest steel companies. By 2011-12, the combined entity would have a capacity of around 40 million tonnes, which is more than India's current total production of 38 m.t. (in 2005-06).

The domestic demand is expected to be buoyant with the construction industry set to grow at 11 per cent. According to many industry analysts, even the global demand is expected to steel up. One of the most fragmented industries, steel prices used to be dictated by a handful of large entities.

But with all the consolidations happening in the industry, the extent of price volatility can be expected to drop as fewer powerful entities influence prices.

Global uncertainty

The uncertainties looming over the global business environment and the absence of a clear trend in the business cycle have resulted in uncertainties in demand and no clear price signal from the steel industry. Considering the nature of the industry where supply cannot be immediately controlled to influence the price, there is need for price stability for the steel producers to expand capacities. The current phase of consolidation may stabilise prices that have for long been quite volatile.

Future Outlook

Though the US economy has slowed to some extent due to the untenable growth in housing sector, the current global demand for steel is sustaining on the back of exponential growth in developing economies in Asia, especially in China and India.

With sustained global demand and the industry consolidation gathering momentum and no major capacity additions expected in the next few years, there is every possibility of the steel producers getting back the pricing power.

In fact, the consolidation is also expected to lower the prices because of expected synergies in such areas as procurement and logistics though the timeline is difficult to predict. In the near-term there are expectations of a drop in prices by around 5 per cent on the back of the down in the global economy, but the real downward pressure on prices may happen by about 2010 with capacity additions coming on stream.

However, if the recent drop in iron ore imports by China were to be considered an indicator of a slowing of steel production, then there may not be a glut at all. Chinese production of steel and pig iron stood at around 420 million tonnes in 2006 with steel output up 15 per cent over the previous year.

Chinese measures

China has taken various measures to slow the runaway growth in infrastructure thereby reducing the consumption pressure.

With slight oversupply in the US and the expected drop in steel consumption, steel might lose its sheen but there may not be any significant impact as China is also curbing excess production thus compensating for the drop in consumption.

Considering the current situation, a clear picture is expected to emerge by mid-2007 when the direction of the global economy also crystallises.

Since India is fast emerging a major steel producer, the time is ripe for the country's steel producers to import best global practices to minimise loss and maximise profits.

(The author is an Economist with MCX. The views are personal. All the forecasts and analytical statements are based on news and views of analysts and not necessarily that of the author.)

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