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2011 critical year for steel industry

2011 critical year for steel industry
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First Published: Wed, Dec 22 2010. 09 25 PM IST
Updated: Wed, Dec 22 2010. 09 25 PM IST
Global steel consumption is likely to grow at a much faster rate than the 13% growth forecast of the World Steel Association. Between January and November, crude steel production was up by 16%. This is despite the seasonal drop in steel production in regions such as Europe. Global crude steel production fell by 2.8% on a sequential basis in the November quarter. China’s output was stagnant in November, after rising by 5% in October over the previous month. The country’s steel output has been under pressure for months, due to the government’s attempt to prevent the economy from overheating. Europe’s steel production fell by 5.3% and by a much lower 1.5% in North America.
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India’s steel output was down by 3.2%, though large steel makers have been talking about buoyant demand. One reason could be the shutdown of Ispat Industries Ltd’s steel plant since early November. The plant has been restarted recently. Another reason could be higher iron ore prices and lower conversion margins between sponge iron and billets, leading to smaller steel companies selling sponge iron instead of steel, according to a Motilal Oswal Securities Research report.
The global steel scenario is in favour of steel producers, as restocking in countries such as Europe and North America has led to a recovery in 2010, after the slump in 2009. If there are worries, these are on the raw materials front; both iron ore and coal prices have begun to increase again in recent months. But companies have used the stronger demand environment to hike prices to end users, which should offset the impact of higher costs on margins, to some extent. Companies have also been disciplined in keeping production under check, with utilization falling to the 73%-75% range in the second half of 2010, compared with the highs of 83% seen in April.
The long-term outlook for steel production is bright and, according to an Xstrata Plc presentation, should rise by a 3.6% compounded annual growth rate between 2010 and 2020. The medium-term outlook is still uncertain. Arcelor Mittal said that real demand is growing at a slower pace, due to uncertainty over the economic outlook for 2011, in a recent investor presentation. On the positive side, it believes that steel inventories in the US and Europe are at relatively low levels, which will be a positive when demand recovers.
Indian steel companies are in a comfortable position, as lower Chinese output has brought down the threat of imported steel flooding the market. In November, steel imports were down by 62% over the year-ago period. Also, the ban on iron ore exports has given steel makers an edge. Since their capacities are not enough to meet domestic demand, they will depend on steel prices rising to see their performance improve in fiscal 2012 as well. That depends on a few key factors: chiefly whether developed economies recover and when China returns to its earlier high growth levels.
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First Published: Wed, Dec 22 2010. 09 25 PM IST