A high degree of enthusiasm in the stock markets has greeted the higher than expected improvement in the financial results of steel companies announced for the first three quarters of the year 2000-01. Steel majors - Tata Steel, Steel Authority of India Ltd., (SAIL), Jindal Vijaynagar Steel Ltd. (JVSL), Essar Steel, have all seen remarkable increases in their share values in the stock market. More than performance, the stock market's response has been guided by a perception that the worst is over for steel in India and certainly in the world market. While the perception may be true to a small degree, there are reasons to remain cautious about the euphoria in the market today.

The downturn in the international steel prices that started in the middle of last year is over. Steel makers should feel comfortable with the fact that steel prices will not drop any further. But that is not what steel companies are looking for. The current prices are among the lowest recorded in the last ten years. Unless prices move up substantially from these levels, the fortunes of steel makers are not likely to improve to match their expectations.

There is optimism in the US market, which accounts for about one seventh of the total global sales of steel as also one fifth of the total effective blue water international trade in that product. The origin of the ensuing crisis also had its origin in that market, although many more factors, external to the conditions of the US market, were responsible for it. The crisis was triggered off by speculative imports and mindless increase in output by domestic producers who had total disregard for the actual size of the market. So important was the US steel market for the global steel makers that anything that happened there started being considered as the global trend in the industry. The reality may be far off from that especially today. But the global steel community is unmindful of that and therefore continues to be led by the developments there.

Last fortnight, US steel makers raised the prices of flat products like hot rolled (HR) coils, cold rolled (CR) sheets and plates. The increases vary from about $20-40 per short tonne for HR coils, $30 per tonne for CR sheets and about $10 for plates. As for plates, the real increase sought is actually about $2 only as Bethlehem Steel, which raised the prices, in fact, has scrapped the $8 per tonne energy surcharge they had imposed earlier. All these increases on their price lists are to be effective from March first week in most cases.

Quite in line, the European steel mills have been reported to have jacked up their quotes by another $20 per tonne for HR coils. Again, what they will finally get is a different matter. European buyers, on the other hand, are not raising their bids above $ 185-190 per tonne, c&f. The Japanese are ready to sell at $200 per tonne c&f south east Asian ports. The Russian and Ukrainian mills are settling deals at $170-180 per tonne c&f in South East and East Asia - up about $10 per tonne.

The increases sought by US mills are far on the higher side and may not be realised, at least fully, in most cases. Past experiences bears this out. Steel makers in the US, traditionally, as a matter of habit, increase prices keeping huge provisions for bargains later. They have perhaps opted for huge increases, once again trying to create panic among buyers that may set off another round of speculation from which they are to gain the most.

There are factors, nevertheless, that have supported the US steel makers' bid to raise steel tags. One, imports have declined. Two, the domestic shipment was down in the last couple of months. Both these factors have resulted in lower current supply. Three, inventories, with the end users and service centres have fallen. Four, the US dollar is weakening to provide some extra protection to the domestic industry. The same factor has also been responsible for making exports to the country less attractive from many regions. Five, oil pushed energy price hikes have led to an increase in the costs of production and freight in the country. Six, the seasonal increase in economic activities and stock building have led to a seasonal increase in steel consumption and booking. Such an increase may not reflect any longer term trend.

But steel demand, in the longer term in the country, is on the slide. The year, for certain, will end up with lower steel consumption. One of the major factors that determine the costs of production of steel in the US mini mills, the steel scrap prices, had a sharp fall just at the time when the US steel mills announced their price increases. Low costs, in the absence of strong demand, will certainly bring prices down.

Price increases in the US, even if there are any, whatever that may be, are unlikely to become a global phenomenon. Therefore, there is no strong reason to believe that the material conditions for the Indian steel makers have changed as a result. In fact, Indian steel producers are poised for a better show at the strength of the domestic market this year. Till the last report came in, steel based construction activities are on a upswing in the country leading to a surge in consumption of pipes and tubes, galvanised sheets, bars and rods and even plates. But with a shrinking export potential, the country's industry is facing some uneasiness. If exports have to fall from the current level of over 3 million tonnes, which involves critical products like HR coils, the pressure on the domestic market will become unbearable.

However, looking at prospects from a larger perspective, there are several positives in favour of Indian steel companies. One, most of the companies have managed to reduce costs, either by improving on their
efficiency or by taking advantage of reduced prices of raw materials. Such reductions may not have made them the best in the world, but they are certainly not insignificant. Among them are companies rated among the best in the world, both in terms of current performance as well as future prospects. Indian companies have also made their presence felt well in the world market. This will help them, if everything goes well, become global players in the real sense with scale, quality and financial strength.

2001 will be a year of greater activities for steel makers in India. It is time the industry plans well for the world market and prepares for a more consolidated home market.