Jul. 4, 2009 (The Hindu Business Line) --
Adarsh Gopalakrishnan
The recent bull run in the commodities markets has seen the Reuters CRB Metals index rebound by 60 per cent from its December lows. However, steel is one commodity which appears to have missed the bus, with prices hovering at just 10 per cent higher than the December lows.
Steel consumption has been battered by the economic crisis, with global prices dropping 45 per cent from their June 2008 peak. The decline in global demand for steel has reflected in production cuts by steel producers and rapid drops in prices of raw material such as iron ore and metallurgical coal.
Deep production cuts
Steel is a vital commodity input for the automobiles, infrastructure and machinery. With the credit markets freezing and consumer confidence taking a beating, demand for steel has dropped rapidly. Global steel production hit a peak of 119 million tonnes in May-June 2008, which was a 25-year high. Since then, the decline has been rapid.
Global steel production for the first four months of 2009 stood at 354 million tonnes, a 23 per cent drop over the same period last year. This drop has been attributed to rapid de-stocking, the process of players clearing out the inventory rapidly while cutting production.
If China, which produces 48 per cent of the world’s steel is excluded, the drop in output was even higher at 36 per cent. Crude steel production in several developing economies such as Brazil and Russia registered huge falls in production by 46 and 31 per cent respectively.
Chinese production remained flat at 170 million tonnes. By its sheer magnitude, this buffered the rapidly dwindling output in advanced markets such as US and Europe, which saw production nearly halve in this period.
Demand still uncertain
The pace at which steel production has dropped has certainly been sharp when compared to how global industrial activity has contracted over this period. While world GDP contracted by 2.5 per cent according to the IMF, steel saw a 24 per cent decline in output. This could indicate that the process of de-stocking has been more severe than warranted by the slowdown and that the worst could, therefore, be behind us.
However, despite all the talk of green shoots, the global demand for steel continues to look far from rosy, with the glimmer of hope being demand for steel driven mainly by China and India. China’s heavy infrastructure spending has fuelled domestic steel production there.
A strengthening of steel prices from here appears to depend mainly on how several factors such as government stimulus spending across key economies pan out and the pace and direction of such spending.
