By Kunal Bose
How would steel, which is nursing much overcapacity, particularly in Europe and China, fare this year? The jury is out on the subject---steelmakers, who continue to be roiled by the fallout of the 2008-09 recession, would stumble along this year, when demand and prices are expected to improve, albeit at disappointing rates. The World Steel Association's prediction in October that steel would again record low consumption growth in 2013 finds resonance in forecasts by many agencies and in polls conducted by industry officials and analysts. The Financial Times, too, conducted a survey on this.
Nothing underpins this year's prospects more appropriately than Citigroup expert Tom O'hara's observation. "We will see another year of weak earnings for steel producers in key regions, especially Europe, which suffers from chronic oversupply," he predicted.
Chandra Shekhar Verma, chairman of Steel Authority of India Limited (SAIL), says India being a "demand centre where steel growth would rise in multiples of 1.2 of gross domestic product (GDP), we will be largely immune from the metal's secular trend of low consumption rise in most parts of the world." It is expected India's GDP would expand 5.7 to 5.9 per cent. For the 12th Plan, the growth target has been revised to eight per cent, though this, too, is challenging. Steel demand for in the coming years can be estimated by using the multiple stated by Verma.
Rod Beddows of Hutch Finance shares Verma's optimism on steel demand continuing to grow well in places such as India. In the Financial Times survey, Beddows spoke about the pending “huge and unmet demand for steel consumption, as the world outside developed nations continues to urbanise and industrialise”. The unsettled situation in most regions hasn’'t stopped him from believing steel output would double, though over a “prolonged period of 40 years.” In the relatively high-cost Europe, the steel market shrank somewhat, leaving Tata Steel Europe with a loss of $884 million last year. ArcelorMittal (for its European business) and ThyssenKrupp had to resort to writedowns of $4.3 billion and $3.6 billion, respectively.
Tata Steel Managing Director H M Nerurkar says the government's push on reforms, the promise of single-window clearances for infrastructure projects and the manufacturing and consumer durables sectors benefiting from likely rate cuts by the Reserve Bank would have a positive impact on steel--- in 2013-14, demand is estimated to grow about seven per cent, against 5.5 per cent this year.
Whatever the demand pattern, it is unlikely that in a globalised trade environment, the fortunes of our steel industry would remain totally insulated from global realities such as overcapacity, leading some producing countries to become aggressive in exports to the extent of dumping. In the first eight months of 2012-13, our steel imports rose 21.4 per cent to 5.10 million tonnes (mt), while exports surged 21.6 per cent to 3.3 mt. This year, India would remain a net steel importer. JSW Steel's Sajjan Jindal says India is likely to end the year with imports of eight mt, about 10 per cent of the demand.
Verma takes comfort from the positive movements in steel prices in recent weeks. For Nerurkar, this year holds prospect of steel prices “firming up and staying stable”. However, a poll of industry officials and analysts led the Financial Times to say average steel prices in 2013 were likely to rise 2.3 per cent, in line with the “weak price rises since 2009”. Before the recession, the world had witnessed a secular trend of steel prices rising five per cent annually. In case the upside in steel prices is 2.3 per cent, our steelmakers, who enjoy a tariff wall of 7.5 per cent, can, at the most, hope for defrayal of the raw material cost rises.
We have seen a classical V-shaped recovery in iron ore prices---from a low of $88.75 a tonne in early September to about $145 a tonne---primarily due to a demand recovery in China. Earlier, steelmakers in China were running down stocks, in line with the slowdown. Macquaire, London, says in the first quarter, the benchmark ore (with iron content of 62 per cent) would sell at an average of $140 a tonne. “Regrettably, mining restrictions in several states, which have severely impinged on exports, are not allowing us to benefit from the world ore price surge,” says H C Daga, president of the Federation of Indian Mineral Industries.
Some relief for our steelmakers is the fact that unlike iron ore, coking coal, for which we are largely import-dependent, has been subdued. The world’s dominant coking coal exporter, BHP Billiton, has settled the first quarter contract for the fuel from Australia at $165 a tonne. This is at a discount of $15 a tonne, compared to domestic Chinese prices. “I am not suggesting the world steel environment, even while it is showing some signs of easing, would not remain difficult. But in India, the demand outlook is such that no steel group has put its capital expenditure programme on hold,” says Verma.