Steel prices react to Chinese exports deluging world market

Steelmakers all over the world are facing a crisis of low demand and very low prices, which leave either slender or no margin for producers. Let us consider the case of ArcelorMittal, the world’s largest steel producer. In the third quarter of 2015, its year-on-year sales dropped to $16 billion from $20 billion, causing a net loss of $711 million against a profit of $22 million.

This is in spite of the European part of the company, represented by erstwhile Arcelor, and the group’s US and Canadian operations are mostly about products at top end of value chain requiring application of technology that is a close preserve of a few. If this is the condition of an industry leader then the torrid weather faced by those making commodity steel as in India is easily understandable. We have seen quite a few highly disquieting working of Indian steelmakers – both in the public and private sectors – in the September-ended quarter.

The global steel crisis is largely due to an overcapacity estimated at 600 million tonnes (mt) by the rich country club the Organisation for Economic Cooperation and Development (OECD). Worryingly for the global market, half of that excess capacity rests in China, which has its compulsions to make a lot more steel than it needs.

How soon all that extra global capacity is going to go away depends on two things: First, China’s progress in scrapping capacity that is uneconomic and environment damaging. It is common knowledge that the provincial governments in the country remain resistant to mill closure to protect jobs and score province-centred growth often to the point of angering Beijing.

What is obvious is, the provinces are providing large dollops of subsidy to sustain steel production. Metal Bulletin says Chinese companies are found exporting steel regularly at prices 10 per cent below what they charge locally. This, according to The Economist , is the textbook definition of dumping.

No wonder, then, Chinese steel products are from time-to-time attracting retaliatory duties and on occasions, anti-dumping imposts, too, in various parts of the world. In September, India put a 20 per cent safeguard duty on imports of hot-rolled flat steel. The growing arrival of foreign-origin steel (not only from China) taking advantage of a liberal import duty regime here is cornering a significant share of Indian steel demand at local producers’ expense.

Second, world economic growth, particularly in emerging nations, will have to be much stronger for better use of steel capacity. But steel demand in China, which fell to 711 mt in 2014, will further contract 3.5 per cent this year and then by another two per cent in 2016. But Chinese steel production in the first nine months of 2015 was down only 2.1 per cent to 609 mt.

The implication of trends in Chinese demand and production is disturbing for other steel producing countries. China’s record steel export of 11.5 mt in September is a pointer to the country finishing 2015 with overseas sale of 110 mt against last year’s 94 mt. The country is, therefore, set to export steel this year equal to what Japan, the world’s second largest producer, makes annually.

Low demand and surplus capacity have resulted in global steel capacity use sinking to 68-69 per cent. In the context of the industry’s high fixed costs, mills should run at least at 80 per cent capacity to be able to use raw materials efficiently and retain pricing power. It’s no surprise, then, that in recent periods, the fall in steel prices has been sharper than in raw materials, particularly iron ore. So the spread that steel producers are to earn is squeezed.

From ArcelorMittal to Tata Steel Europe, every steelmaker will, therefore, be heard complaining about damage to steel prices being caused by China. But producers such as Posco and Nippon Steel with large proportions of high-end steel in their portfolios requiring the use of very advanced technologies are not faring as badly as commodity steel makers.

Is not there a lesson for major Indian steelmakers here? They should ideally make attempts to rope in steel companies in Japan and South Korea as joint venture partners with a flexible approach to equity ownership and sharing of management control to make electrical and high auto grade steels for which we are import-dependent. As we chase an ambitious capacity of 300 mt in another 10 years, a focus area should ideally be to build competence to make steels for which we are technology-deficient.