Overcapacity stares in the face of steel-makers

ANALYST'S VIEW

It was as recently as the end of July that the head of the world’s largest steel-maker Lakshmi Mittal said that the steel industry would find a firm floor under prices and profits till at least 2011 on strong demand and supply constraints.

At the time, everyone agreed with Mittal that the industry would continue to remain in a “strong and sustainable” position.

When Mittal was talking, the US and south European markets had already started showing signs of falling demand. But such was his faith in emerging markets such as China and India that Mittal said, “I don’t see any major weakness in overall levels of demand.”

The summer optimism has now given way to soul-searching as to where the steel prices are heading as the frightening US economic crisis is having a domino effect. What a summer it was – steel was selling at record prices and an 8 per cent demand growth was forecast brushing aside concerns about the US market getting into recession.

Earlier than anticipated, steel billet quotations on the London Metal Exchange have become bellwether for Asian and Mediterranean construction markets. LME billet prices are substantially down since July. What is also distressing for steel-makers is the rapid slide in benchmark hot rolled coil prices from over $1,000 to $780 a tonne. There are still profits at the current price level since the industry’s average HR coil production cost is $650 a tonne.

Price falls of this order confirm that the world no longer has strong appetite for steel, what with the construction industry in the US and elsewhere in a coma and automobile makers forced to cut capacity. As a grim situation unfolds with frightening speed, steel-makers are bracing themselves for overcapacity by year-end. They will perhaps be left with no option but to accelerate production cutbacks.

Even while ArcelorMittal is going for some major rollback in production at its Kazakhstan and Ukraine mills, Mittal said the other day that he didn’t think the steel industry was moving towards “overcapacity.”