The near-term outlook for steel prices appears clouded. Since April, metal prices, including steel, have been declining due to fears of the after-effects of the euro-zone debt crisis and a forecast decline in China’s appetite for metals. Latest steel output numbers from the World Steel Association, however, do not reveal any cracks. Global steel output rose by 29% in May from a year ago and by 3% on a sequential basis. Corresponding figures for China, which accounts for 45% of global crude steel output, are 21% and 1.3%, respectively. Europe, North America and Japan are among the large producers whose output has shown a significant rise. Steel capacity utilization has been rising, up from 72.2% in December to 82% in May.
In early 2010, expectations were that steel prices will rise due to a sharp jump in contract prices of iron ore and coking coal. But a question mark over Europe’s financial position and slower demand in China has altered the demand side dynamics. China is a key factor in influencing steel price movements, given its position as a large producer and consumer of steel. China’s decision to be flexible on the yuan-dollar peg could see the yuan appreciate, making steel exports less competitive, as exporters will get lesser yuan per dollar sold.
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In another surprise move, China announced the end of a 9% export rebate given to several commodities, including several grades of steel. Chinese steel exports were making zero profits but for this rebate. This will lead to producers selling more in the domestic market, according to a Citigroup Global Markets report. Chinese steel prices may fall further as a result.
Investors are expecting Indian firms to benefit from these developments. Lower imports from China are expected to lead to higher demand and, hence, better realizations for Indian firms. Whether this will actually materialize will depend on how Chinese firms react to these changes. While a stronger yuan lowers prices, imported inputs such as iron ore become cheaper as well. The actual impact on Chinese companies and their response to these measures remains to be seen. Indian companies may gain a little, but lasting benefits will come from steel prices rising. If steel prices keep falling, profitability will remain strained.
Graphic by Paras Jain/Mint
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