( Dr. A.S.Firoz is Chief  Economist at the Economic Research Unit of the
Joint Plant Committee and Convenor of Steel Exporters' Forum.)

Reckless capacity growth may take shine off stainless steel

By Dr. A.S.Firoz

May 28, 2001

Stainless steel seems to be under strain in the world market. Prices of flat stainless steel have dropped in the absence of adequate support. To some extent, it is also the excess supply that is at the root of the current state of trouble in the industry. It is important to note that when the carbon steel prices had a free fall, stainless steel held its ground for quite some time. In fact, there is no strong relationship between these two product markets. While there are still no signs of an imminent recovery, the long-term prospects of this industry seem to be coming under a cloud of uncertainty with increased supply threatening prices despite the possible expansion of market for this product.

Till the recent slowdown came on top, there was no doubt that the stainless steel market growth was set only to grow. The global consumption leapt 5-6 per cent on the average compared to about 1-2.5 per cent for carbon steel during the last decade. There were years when the global demand for this product had touched the 8-10 per cent zone. There were reasons, therefore, for the industry to be euphoric about its future. More than what pure numbers said, the industry's assessment was based on a variety of economic and technological factors that lent strength to this product's sustained growth.

But if the current trends in investment are any indication, the industry is likely to develop excess capacity soon, despite rise in demand. In such an event, steel makers will not get what they deserve in terms of prices. The story will not be any different from what has been read out for carbon steel at present. In the immediate, the problem is more on account of a slowdown in global demand.

The economic slowdown has hit the US demand - more for the flat products. Though some US producers have made brave attempts to raise the price of these products, their move may remain recognised at best only as 'brave'. It is unlikely that they will succeed in getting anything more than what they are getting now. This is the reason why the other US steel makers have not joined the brave few. They are waiting and watching. They all know that the ground reality is far from being conducive to any price increase move.

The European market is passing through a difficult phase. In 2000, the apparent consumption of this product dropped 9 per cent from the previous year. The two major stainless steel makers, Avesta-polarit and Acerinox have both reported sharp drops in their profits in the first quarter 2001.There are others to follow suit.

The Asian consumption is stagnant at best. China is an exception. The Chinese have demonstrated a  tremendous appetite for this product. They import huge quantities (perhaps about a million tonnes, but the figures do not seem to be very authentic) to meet the country's annual consumption of about 1.2 million tonnes (as of 2000) after having produced nearly 0.57 million tonnes themselves. According to experts, China's stainless steel demand is set to grow to about 1.6 million tonnes by 2005 and nearly 2.5 million tonnes by 2010.

But the Chinese market is not going to be there for the rest of the world for long. The Chinese stainless steel production is fast on the rise and the pace is to increase further as the new planned capacities are in place.

Shanghai Krupp Stainless Co, a Sino-German joint venture company, is commencing production at its first phase facilities with a capacity of 72,000 per annum from November. The plant will finally reach an annual capacity of 440,000 tonnes by 2006. Its cold rolling capacity then will be 268,000 tonnes. Plans are afoot in the country now to set up an integrated plan that would make about 2.5 million tonnes of steel out of which more than 1.4 million tonnes will be stainless steel flat products. There are several other projects under conception.

In the short run, before the country enters WTO, the government surely will restrict imports to the bare necessity and only that much the country's industry cannot deliver. Therefore, even if there is a market, it is closed for the global players. The complex system of licensing and trade cases will come in the way of the interested exporters to this country.

The big question in the immediate is if the worst is over for this industry at least for the time being. Many believe that it is so. They see some stability in the market. The prices are not falling further. But that itself does not mean the trouble is over. For example, the prices in the range of $1100 per tonne for 2 mm 304 CR sheets  are not very much above the bottom in the recent years. If the prices are so low now, there are questions - what will happen to those if the global economy faces a recession? Stainless steel gets hit by the rise and fall of the manufacturing activities. That is the reason why there are suspicions over the product's growth globally in the next couple of years.

The International Stainless Steel Forum has forecast that strength in the market will not be back till 2003. Only after that does the Forum expect the growth rate of consumption to return to 5-6 per cent. The Forum also predicts that the average price of the product this year would remain about 26 per cent lower than that in 2000, despite the observed recovery of the same in Europe and relative stability elsewhere in the world..

This is no good news. But losing hope on stainless is not recommended.

Stainless steel's growth has not been so much on account of pure expansion of economic activities. Even on a limited scale this product can grow on account of new applications coming in substitution of traditional materials such as carbon steel, aluminium etc. Therefore, replacement demand can play a major role in the product's growth. Further, there is greater focus now on its application in construction. The item has been actively promoted the world over by active agencies and their efforts have yielded results. There were huge efforts at product development. These efforts were also geared to convince the potential buyer or user of its long term advantages over its substitutes.

The problem before the industry is that there is more capacity than needed to meet the global demand. The estimated global capacity is nearly 20 million tonnes. This has not helped the industry make money. Consolidation in the industry thus is a major issue. Mergers and acquisitions are taking place and the share of the top five major stainless steel companies in the world is rising. Today, they reportedly account for nearly 45 per cent of the global production. The top ten reportedly account for 80 per cent. Consolidation, as expected, is strong in Europe. After Avesta-Polarit formation, the Usinor-Arbed-Aceralia merger has created another stainless steel global behemoth. Most fail to take notice that the latter merger, known more for carbon steel, is in fact a major stainless steel business merger at the same time.

Although the current slowdown is not a major cause of worry and the problem of overcapacity in the industry is not as serious as that for carbon steel, rampant and reckless capacity growth has the potential to bring in insurmountable misery to the industry on a later date. Acerinox in North America is coming with 800,000 per annum capacity, Thyssen is adding 400,000 tonnes in Italy and 600,000 tonnes in Belgium. There are many more in line. If these projects and many others under planning now are really pressed into operation, there will be a glut in the market and the ensuing competition for survival will kill both prices and the new companies.

The industry needs to be watchful at this stage itself of excess capacity. Once that is built up, excess production becomes a compulsion as capacity utilisation becomes the prime concern for any capital-intensive industry. It will be too late then as resultant lower prices will only choke the global market with trade cases slapped everywhere. There are already a number of such cases on stainless involving most major markets.

(The views expressed here are of the author.)