There is one steel product that has seen more competition from substituting materials than any other. It is tinplate. Yet, this product has not seen as much disturbance as others have so far. The prices, although come under pressure when the hot rolled coils prices drop sharply, in general, have remained relatively strong in the last few years. Only a few weeks ago, the US tinplate makers have decided to increase the price of this item in the midst of a catastrophic decline in the prices of other flat rolled products.

The main reason for it is that there has not been any major capacity increase in this product line for several years now despite the fact that the demand for this product is on the up, albeit slowly. In the US, where
the consumption of tinplates is the highest, capacity has remained more or less in the zone of 4 - 4.5 million tonnes for many years. Thailand has added some capacities in the face of strong domestic demand. But, this was marginal.

The tinplate makers cannot easily be persuaded to add capacity. This is because they always see this segment of the industry under the threat of substitutes. There are no expert reports projecting huge increases in demand, although the growth in this segment of the industry has been fairly steady.

As against this, the prospects of investments in flat products, for HR coils mainly, have been carried away by hypes rather than by real assessment of the situation. As a result, more capacities are getting added than needed. The steel makers have not carried their tinplate wisdom on to the other steel products.

By now, the steel makers are well versed with the follies in the past. But, leaving the blame entirely on the individual steel maker's errors of judgment will not also be correct.

The steel companies by their own actions have created chaos and disharmony in the market. It is because they do not have perfect information. Nobody will have it either. After all, in real life you do not have the omniscient and omnipresent seller or the buyer. But, it is not just the information that the steel companies lack. They have plenty of those, but, fail invariably to see the macro picture ahead of them. It is, however, improper to blame it all on the steelman. More than an intrinsic weakness on the part of the steel companies to assess the market and take the appropriate signals, the overall system continues to disseminate misleading signals, reading those in the right perspective may at times be tougher than one thinks it to be.

Let me take for example the happenings in the global steel market today.

The prices of flat products have continued to fall. What is important in it is that there may not have been any appreciable decline in global consumption of steel. This is true for flat products also. This is known to
all. Yet, the steel makers could not do anything to control a disturbance that was perhaps caused by a momentary structural malfunctioning of the market. The accumulation of stock of a million tonne or so at some US ports was not a matter so big to trigger off a downward price spiral to make a product like  HR coils cheaper by over a $100 per tonne.

The problem in the US, in fact, started much earlier. A market that was protected by a host of anti-dumping actions, had prices higher than in most places on the earth. Higher prices signaled larger demand. The steel
companies around the world were not wrong in concentrating on that market going by this signal, but, in accepting the signal alone for continuation of exports beyond limits of absorption of the same in the market, they fell into error. Somebody somewhere should have realised that the higher prices in the US were not due to natural reasons. Therefore, continuation of imports into the country at the prevailing rates could definitely hit the prices at the first sight of a stock build up. The irony is that the US industry itself was blissfully unaware of it. The mills continued to jack up production although cried hoarse over rising imports. Production
continued to surge even when the stocks got built up right next door and also at their own yards. The market was sending good signals but the self-seeking steel mills did little to act upon those. They were victims of the system and their actions were determined more by the systemic leverages than by their own intentions and judgments.

The system allowed for unhindered capacity growth for a long time. With changing global business environment, every country, came to see new opportunities for itself in areas hitherto distanced from them. Steel is one industry that has seen, as a result, the highest level of regional dispersion of capacity in the recent decades. Many countries, not in steel business ever, came to believe that they could also produce steel and that too more efficiently than others. They also believed that with their own production they would not only substitute imports but also find a place in the foreign markets. Therefore, the logical corollary of that was to set up more capacity than the domestic market would absorb. This false perception was not the creation of the self-seeking steel industry alone. In many places, the respective governments, banks and even international financial institutions fully supported this and acted together to build those capacities which are headaches today. The governments, in most places, keeping the steel industry protected by high tariff and quantitative controls, sent again a bunch of wrong signals to the industry. The industry thought the governments would continue to protect its 'own' industry and therefore, there were no reasons to fear in death global competition. The developing countries also continued to provide incentives to export. Therefore, the market was not allowed to operate. The system instead of killing the inefficient, continued to give birth to plants, many of which were still born and some handicapped.

Then, with increased competition and abundance of new technologies, there was the surge to modernise the older plants. Every modernisation led to cost reduction no doubt, but also increased capacity invariably. The older and the inefficient continued to survive by some means of the other. In competition, the cost savings were lost. It is only a matter of fact since 1997, the global steel prices have fallen. This was a time when the steel industry everywhere made massive savings in costs on account of better operating practices, reduction in the prices of raw materials and better labour productivity. The drops in steel prices were large enough to
neutralise more or less fully the gains of cost savings to make the industry sick in large parts. It is so ironical that the steel industry, so capital intensive, sinking so much money on cost savings gained practically nothing out of it at the end of the day. The reason ?

Every modernisation and also every new greenfield investment was to out compete a fellow steel maker and take its place. With everyone thinking the same way, the market generated a vicious circle where you cannot survive without modernisation, involving large capital investment and if you do that you are likely to be sunk in debt with your survival also threatened. The steel mills have had in fact very little choice. They took to modernisation and the enterprising entrepreneurs went ahead with new plants complicating further a situation already complex beyond anybody's grasp.

It is the urge to survive that has determined most of the rather irrational behaviour of the steel companies. Nobody would initiate production cuts, a must for the industry now. They would wait for others to do that. They want others to quit. This unwillingness to take individual decision and the selfish interest in waiting to see others die first, collectively, weighed heavy on the market. In this process, the market corrections are delayed. The consequences of this are obvious. The mills accumulate stock and then drop prices to get rid of it.

The current problem of inventory accumulation could be foreseen way back in February itself. The steel production rate globally was over 10 per cent. It would have been only wild to believe that global consumption rate was also up the same way. However, there was total disregard to the need to cut
production. It is being initiated now when the prices have already reached the rock bottom.

Production cuts are needed for a recovery now. But, the systemic forces are such that this will not take place so quickly. There will be national concern everywhere that may trigger off only protective and supportive actions leading to more complicated global trade disputes. This will not help. Ultimately, foreign competition is not everything. A country with excess production will find competition growing within its own territory to such critical levels that the advantages of  higher price will have totally gone. This is again a system induced response to a crisis that is neither rational nor beneficial to the industry.