Global steel companies are feeling the pain of slowing economic growth, especially the stress visible in the euro zone and slowing economic growth in China.

By Bloomberg

Steel production between January and November 2011 had gained 7.4%, signifying that growth rates have come off sharply. The European Union region’s output fell 2.1% from a year earlier, with Germany and the UK being the chief contributors to the decline.

Another large block, the Commonwealth of Independent States suffered a 3.2% decline. The only bright spot was the Americas. North America saw output rise 12.2%, while South America rose 5.5%. China’s steel output fell 0.2%, and its share of global steel production has declined to 43.2% from 46.7% in January. That is a significant drop and has been caused by slower demand for steel. This is the result of the government’s efforts to contain economic growth—to bring inflation in check.

India’s crude steel output has gained 8.9% in November, better than the global output, because of an increase in capacity. But consumption of finished steel has slumped and has increased by only 2.9% from a year earlier in the April-October period, according to Joint Plant Committee data.

Local companies will suffer the effects of lower domestic demand, which comes at a time when exports will also come under pressure.

Companies such as Tata Steel Ltd, whose European operations are the bigger contributor to sales, will also suffer from falling output in the region. Tata Steel Europe, in fact, has been mothballing capacity, in a bid to reduce losses.

To be sure, all of these developments have led to a fall in steel prices. For instance, Chinese hot-rolled steel coils sheets are trading 6% below their early-October levels. The consolation is that iron ore prices have fallen too, by a steep 23%. Coking coal prices too have turned benign. The fall in input costs will bring some relief to steel companies, once the price declines start reflecting in their new contracts.

But demand is the main worry. ArcelorMittal said that steel demand is at 75% of its pre-crisis levels (the 2008 financial crisis) and it does not see a swift recovery.

India’s economic growth too has hit a bump, negating the possibility of a recovery in local demand for steel. Revival in demand is the key factor to watch for, which will set the stage for an eventual recovery in product prices.

Graphics by Yogesh Kumar/Mint

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