The global steel industry is lowering production as it attempts to correct the gap between availability and demand. An increase in inventories has put pressure on prices and major producers, particularly in China, are cutting production.

When mining firm BHP Billiton Ltd announced its June quarter results, it also sounded caution on the near-term demand for iron ore. The company expects steel production to slow in the near term because of an inventory overhang.

Also See Demand Pressure (Graphic)

Data from the World Steel Association shows that crude steel production in July rose by 9.6% year-on-year, much slower than the 26% growth seen in the June quarter. The effect of the cutbacks can be seen in the capacity utilization figure, which had risen from a low of 72.2% in December to a high of 82.6% in April. Since then, this figure has been falling, reaching a level of 75.1% in July.

China’s production rose by just 2.2% in July, compared with 22% in the first seven months of 2010. It influenced the decline in the overall growth rate, as it accounts for around 45% of global steel production.

India’s production rose by 5.7% and was much lower than 15.5% growth in the first seven months.

Inventory appears to be on the rise in the US, Europe and China. The Metals Service Center Institute’s Metals Activity Report for July showed shipments of steel from US service centres rose by 14.5% over the year-ago period, lower than the around 30% growth rates attained in the previous two months.

A ThyssenKrupp investor presentation shows a steady increase in inventory of flat carbon steel in Europe and US. US Steel Corp. said that flat steel inventory still remain below historical averages and demand appears stable in both US and European markets. Slower production will help producers exhaust inventories and perhaps even give them pricing power, if global demand remains stable.

In the June quarter, Indian companies were carrying excess inventories and cut back on production. Production of finished steel in the April-July period was by just 2.9%, with inventories and imports contributing to meet the 10.6% increase in consumption, according to the Joint Plant Committee, a government body.

Though companies expects steel prices to perk up after the monsoon rains, international price movements will determine if that actually happens. Till the inventory overhang remains on the global steel industry, sustaining price rises will be difficult.

Graphic by Yogesh Kumar/Mint

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