By Dr. A.S. Firoz

The International Iron and Steel Institute (IISI) is not deterred by the run of hopelessness in the global steel market when it attempts to look at the possible scenario at the global steel market in the days to come. The fact that the steel prices have refused to climb and that there is no feel good factor operating in the industry's business are matters not unknown to this apex body of the steel producers of the world. In this circumstances, if the IISI is actually thinking that a 5.8 per cent rate of growth in steel consumption this year over that in the previous is what should be expected, there are reasons for the industry to take the IISI efforts with a larger element of caution. Alternatively, there are reasons to probe deeper to check if the real steel demand globally is so high and that even today's depressed scenario, there is scope to take this industry more seriously than what the shareholders and the lenders have done so far.

At the IISI annual conference at Melbourne, the Secretariat held that the apparent consumption of steel would notch a 41 million tonne increase this year. Even if we discount for the visible inventory accumulation all over the world ( a figure rather unknown to most and difficult even for a guess  ) , the figure should indicate a very substantial increase in actual steel consumption. Although the first half of the year did record some such increase, it did not take more time to show that much of the euphoria in the steel market was based on speculative purchases and stock holding rather than due to increased consumption demand from the end using sectors. Therefore, the real increase in steel consumption in the first half of the year itself was not substantial. Although the situation on ground does not indicate a drop in steel consumption in the second half so far, there is little doubt that the rate of growth of it has definitely fallen. This means that the final estimates for the year as a whole would lie only close to the one achieved last year.

The IISI has based its short term forecasts on the inputs provided by its member companies from various countries. It is rather surprising to find the level of optimism in the industry when the current situation is so bad. There may be many problems. Each country industry generally works out an estimate that is invariably higher than the one that really comes true. This is again a business tactics often to mislead the buyers onto a perception of shortage and future high price. Aggregation of overestimates produces larger overestimation. This is what most likely has happened. The steel club may have also thought of  projecting a scenario a shade brighter than the real one purely to keep the shareholders and bankers happy for the moment.

In fact, the industry meet did pay a lot of attention to the problem of the industry facing an erosion in shareholders' confidence. An industry of this size, of such critical and strategic importance and so capital intensive cannot do without the constant support of the shareholders and the bankers. If not for capacity expansion or greenfield investment, the industry will need money for modernisation and  replacement of obsolete facilities on a continuous basis. The kind of  financial resources that will be routinely needed for the investment is not something all steel companies will be able to manage from internal accruals. Nobody does it also. But, shareholders and bankers put their money not for charity but for profits - to see it grow and safe. Therefore, if the general perception on the industry is  negative, there will be no inclination for anyone to come and invest in that. The IISI Melbourne meet as well as various other steel bodies have been discussing this point. Value creation for the shareholders is of utmost importance. But, this cannot be done by a shower of optimism. The steel industry has to get its own house reconstructed by actions that will ensure its financial viability and strength.

Looking at the specifics of  the forecasts of the IISI on the short and the medium terms, there is little to analytically examine the figures as the basis on which the estimates have been arrived at is not known. If the figure of steel demand of 840 million tonnes for 2005 if is to be accepted, the world should be preparing for additional capacity creation in the industry. Even the current idle capacities pressed into operation will not fully deliver the goods as the same will fall short of the target. The observations in the last couple of years have indicated that the slightest perception of a rise in steel demand brings in investment much in excess of what is needed. Therefore, even if the market grows to the lofty levels forecast by the IISI, the resulting investments will bring in capacity to flatten out the gains one is dreaming of now.

Therefore, even if someone is convinced of the accuracy of  the IISI predictions, another round of mad surge in investment will totally jeopardise investor confidence. It will then become a bigger problem to get the finances necessary to even maintain the existing plants. More than that, the steel industry that is so much asset based and capital intensive, if has to lose value in terms of redundancy of capital employed, will become a drag on the rest of the economy.

Will the steel market recover in the coming months to some respectable level ? Apart from the excess supply that has held the prices down, the prospects of the market are likely to be determined by the following factors.

One, the global economic strength. There is a slowdown in sight. While the US economy is heading  for a soft landing, the EU with investments in the region falling short of the desired level is moving towards a longer term stagnation. The economies in south east and south Asia look less promising today than a couple of months ago. The Latin American economies are performing better with some consumption boom in several countries of the region. The early sign of a large turn around in the Indian economy are fading away fast and in its place are now the signals of another slowdown round the corner. Russia is doing better but not the other members of the CIS. Japan's government boosted recovery can hold on as long as the rest of the world is performing alike. There is nothing significant happening in Africa, the rest of Asia, Oceania and East Europe. Only China and Korea are expected to do well and also lead to larger consumption of steel. It is a mystery why the IISI has not been able to take note of the changing prospects of the global economies to reach some more realistic numbers for steel consumption in the coming years.

Two, the wide fluctuations in currency movement, especially around the US dollar has left a trail of uncertainty in the global investment scenario. Investment needs a stable currency regime. In its absence, the long term investment scenario may be upset.

Three, the possible impact of oil price rise. This may again set in a recessionary trend.

Therefore, the IISI optimism may be quite misplaced. More than that it may turn against the industry's long term interests.