No more Steel Projects please. Begin global dialogue.

By Dr. A.S.Firoz

It is continuation of the same story. The world market for flat products shows no sign of a recovery. In fact, there are reports of it weakening further. In the mean time the prices of melting scrap have firmed up in the world market. It was expected also because of two reasons. One, the electric steel makers in Europe and USA are back from their summer shutdowns. Two, the steel makers had booked enough already at lower prices in the last couple of months. Now, only the residual demand is left from  buyers from Asia  and Africa mainly. But, whatever is the reason, the scrap price hike will have some small impact on the prices of long products. The flat products will remain unaffected by it.

The steel market is forced also to absorb a dose of uncertainty caused by continuous strengthening of the US dollar against most major currencies in the world, especially of those countries having significant presence in the world market. The problem is, the strengthening of the currency has been at varying against different currencies. Not only that the pricing steel for exports for any country  has become difficult as a result,  the weakening of currencies like the Euro has set in motion another round of competition. The countries like Japan, India, UK, Turkey, Taiwan and Korea to get affected by it among others.

The purpose is not again to describe what is happening in the market. It is important to understand why do such absurd situations arise so frequently with production exceeding demand by a margin large enough to leave a trail of uncertainty and disturbance in the steel market.

Let me once again take the case of  Hot Rolled (HR) coils. The price of this product rose to $ 330-340 per tonne in the world export market on fob basis around April. Today, the prices are lower by as much as $ 100 per tonne, if not more. Has the global demand fallen that much in the last couple of months to trigger off such a huge price drop ? No. As per the available data, there seems to be no such  slowdown in demand. Whatever is happening is only insignificant  from the levels a few months ago. At the global level, there is only a slowdown in the rate of growth and not an absolute drop in demand.  Yet, every steel company today suffers because someone sometime had pressed the panic button.  There is no looking back since then as also an attempt to re-assess the situation.

The problem, in fact, did not lie entirely with someone getting panicky and then triggering off a price war. It was also in the assessment of the steel makers globally of the real potential of consumption of steel. The steel makers should not have overestimated the potential improvement in the market way back in the middle of last year. The first sign of recovery in steel prices in the second quarter of 1999 made many believe that the market strength was there to stay. Although the heightened euphoria led  the existing producers to sharply raise their output, one must note that this was the period when many new steel makers came up with their plants ready. The new production facilities in India, South East Asia, Africa, Middle East as also in Latin America and the US added to the already high levels of capacity in the industry. For these companies, it was a matter of co-incidence - having to start operation at a time when the market is weak. It was not a case of faulty production planning resulting from a mis-judgement of the market.

In India, the major problem lies with the new generation flat steel producers. They have capacity much more than that can be absorbed by the domestic market. Whatever financial state they are in, the fact remains that they are capable of producing first class steel, comparable to the  bests in the world  at competitive costs. They can export  at the given world prices. But, that does not help them much if the  world prices are low. Apart from hitting their export earnings directly, these companies will find their domestic prices also under pressure, the floor prices notwithstanding. After all, in a situation of glut, the domestic prices will be determined by domestic competition.  If they withdraw  from the world market, there will be more steel to sell at home. The domestic prices will collapse further without adding to the level of aggregate domestic demand.  Although this may not be the time to expect a trade case in the US against India in the US  although the steel producers reportedly have expressed concern over it ), in the most unlikely event of anything of that sort happening, the flat steel makers will be in a  big jeopardy.

For the Indian steel makers, right from the beginning, it was fairly clear that the new generation steel companies would  go global. They have done it also. But, what was not anticipated right was the market prices. They can continue to accept lower prices till the time the market revives. But, that may be too late and considering the fact that most of time in a global steel cycle the length and the depth of the troughs have been more than those in the past, there is lesser  hope for them to recover whatever they have lost now, fully and substantially, on a future upturn if that is correspondingly steep and as long. The Indian producers, therefore, will have to depend on the domestic market more than they  anticipated in the past. Unfortunately, the reality fell short of every projection. The Indian market will grow at its own pace - not too sharp not too slow. Till it gains some strength, the steel makers will have to wait.

It is innovative and sincere marketing with the common goal to expand steel that can only speed up the growth process in India. The problem the steel makers have is to appreciate that the steel intensity in construction in particular,  is still very low and that cheaper alternatives have taken up the rightful place of steel. It will perhaps pay more in the long run to spend a little more on marketing steel ( not the company's products ) than lowering prices to retain market share.

Notwithstanding all the problems a price a drop can bring in, what is a matter of concern is not just the current state of the market, but the trail it will leave once again on the finances in steel business. This time, the problem for the industry is likely to be more serious.

The steel companies were just  recovering from the shock of 1998. Only from the second quarter of 2000 that the finances of the industry started looking up. Now, with the third quarter results not expected to be good and no different in the coming days, the  steel projects around the world at different stages of completion, including those for modernisation and expansion, will face rough weather. For these companies, the price drop could not have come at a time  worse than this.  Although some of the losses in the form of price drops in US dollar can be compensated by the weakened domestic currencies  in many countries, that is not enough. Therefore, and more importantly, it will be increasingly difficult to convince the banks that the steel demand globally or in India has not really fallen but all is due to a structural imbalance that was not their creation entirely. It is not just the industry that will have to be ready for a painful wait, but also the banks and shareholders.

Perhaps, it is time that more serious thinking is needed for a full fledged restructuring of the industry's capacity. Allowing firms to die their natural death is a solution most clearly seen, but it is not going to be a painless process. After all, even those  in financial wreck  have state of the art facilities. These cannot be left idle nor can be wiped out. Then what is left to be done ?

Clear. For several years from now let there not be any expansion of capacity in the industry. This will have to implemented on a global scale. Who will do that ? One, the national governments can come together to prevent, to the extent possible within the framework of each country's investment policy, any further capacity creation. This may be easy for them at the state sector but not so in the private sector. Two, let the large financial institutions globally agree not to fund any major greenfield project. Let them also not get carried away by fancy calculations proving viability of the existing plants at expanded capacity. In the competitive race, it will be difficult to restrict an enterprising entrepreneur with bright investment ideas to come up with such projects. But, unless there is bank support, no such investment will actually materialise. A moratorium on capacity for five years will sort out most of the problem in the industry. Let the initiativestaken by the OECD on this more seriously.