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

It is time for a mid year review of the health of the steel industry around the world.

In a couple of days from now, the International Iron and Steel Institute (IISI) would have published the crude steel production statistics for the first half of this calendar. Going by what has been seen in the first five months, January-May, of this year, and also whatever has been generally observed till date, the fresh statistics with another month added will not be different.

In the first five months of the year, crude steel production globally has dropped by a small 0.2 per cent. In May, the year on year drop was recorded at 2.5 per cent. However, the May output rose marginally from the previous month. These are no good signs. The trend reflects the inability of the industry to adjust to demand.

In the beginning of the year, there was hope of some price recovery. Apart from the usual second quarter revival, the industry expected some turnaround in global demand and more importantly some downward adjustment in supply that would have led to some increases in price. Although we were careful in this column and had forecast in the early months itself that prices would remain weak right till the end of the year, with perhaps some minor increases from the beginning of the third quarter, our assessment in the subsequent months reflected larger pessimism. We were right but not entirely. We had underestimated the weakness.

After small increases in the prices of flat products, mainly of hot rolled coils (HR coils), the flat steel prices dropped once again in the international market. The prices of HR coils, cold rolled (CR) sheets and galvanised sheets have fallen to their historic lows once again. Incidentally, the prices during January-June this year have been the lowest during the same period in the last many years.

There has been no change worth talking about in the price trend for long products. These have remained low for ages and will continue to be so in the near future. Their stability at the current low levels is unlikely to be disturbed. For the world market, flat products are all that is important.

What can happen now on? Is there any possibility of steel prices gaining strength in the coming months ? If so, or if not, why ?

Several factors will have to be considered before one goes into predicting steel market conditions in the second half of the year.

The global steel production rate will certainly be curtailed. But there is reason to believe that the cutback would not be as much as required to bring in the much needed semblance of stability. It is fairly well known that individual steel makers have as much problem accepting lower prices as they have in reducing output. Therefore, each mill would wait for others to do that first to take a chance to survive by default. This problem will not be there for mills having a clear cost competitive edge.

Such mills may not find great difficulty in getting buyers for their entire output. There are not many such mills. But for those not as lucky as the bests in the world, the choice situation can be critical. Given the current trends, crude steel output is unlikely to drop by over 1.5 per cent, year on year. This means that in the next six months, the production has to drop at a faster rate, year on year.

What about demand? The US slowdown is taking on menacing dimensions. There are reports of inventories of steel with service centres and other users lying at reasonably low levels. Yet, both shipments from the steel mills as well as imports have dropped sharply. At this current rate, we may expect the consumption of finished steel in the US to drop to about 115 million tonnes. If the crisis deepens, the situation may turn for the worse. With steel prices showing no sign of an increase, end users will not find any reason to build stock.

The US downturn has hit the economies dependent on this market. Japan, south east and east Asia, western Europe, Latin America, India, Canada and  Mexico, among the major ones, are all faced with a substantial slowdown in industrial output and exports. Even China has reported that the country's exports are getting hit hard by the US slowdown. The several rounds of rate cuts have yielded nothing and there is no visible sign of recovery in the US economy. In the ensuing competition among nations to retain market shares in the shrinking US market, the currencies of these countries are weakening vis-a-vis the US dollar. The current strength of the US dollar is not helping the US industry in any way.

The US manufacturing industry is losing ground. But the country does not seem to have been perturbed much by it. However, with the IT slowdown, capital investments are reportedly lower. This is a matter of concern for the economy. The last several years of unprecedented investment-led growth boosted private consumption and construction. The economic prosperity of the past decade was not due to the competitive strength of its manufacturing sector. The US slowdown has in the first place brought down consumption spending. Construction, however, has remained fairly stable in the country. Therefore, it is unlikely that the long products consumption in the country would be affected so much. It is the flat products which will have a rough passage ahead due to downturn in the auto and appliances sales.

If the global economic slowdown is a reality to accept now, it will also be prudent in the same breath to expect a slowdown in steel demand. This is evident from various reports coming out time to time. Logically, one can also see that if prices have dropped so much when the supply has not at least risen, means that the pressure on price now is from the demand side.

If production has been going above consumption then there is accumulation of inventories.  There was already an inventory build up last year. This is increasing now, if not in the US then elsewhere in the world, with the producers mainly. Therefore, pricing prospects are weaker in the days to come. This is so for HR, CR and galvanised sheets.

We did expect China's steel consumption to increase this year. But current trends indicate a very large increase in it this year. The country's crude steel production rose 8.7 per cent in the first five months of the year. The trends are likely to be maintained. What is surprising here is the fact that the government there had imposed a whole range of production quotas to ensure that output of steel is maintained at such a level that the prices are not upset as a result of oversupply. There is no sign of these controls now. Taking also into account the fact that the country is importing steel at high rates, at about 20 million tonnes annualised, there will be little hesitation in believing that steel consumption in the country is growing at a high rate. The year will perhaps end with a  growth rate of at least 6-7 per cent in finished steel consumption. The only difficulty one faces in predicting such a growth rate is in the fact that the information on inventories of steel in China is not easily available. Therefore, it may be perfectly possible that the entire production in the country or even imports may not be immediately going for consumption. In that event, there is a possibility of consumption dropping in the second half of the year. But these are apprehensions and remote possibilities only.

The steel demand in south east and east Asia, barring China and Japan, seems to be slowing down. There is literally no growth. The situation, in the best case scenario, is unlikely to change. The worst case is based on a larger impact of the US slowdown on these economies. In that, steel consumption for the rest of the year will drop. We will perhaps be more accurate if we stick to a level which is a little lower than the best case scenario.

For Japan, steel consumption will drop further in the second half of the year. Faced with the shrinking steel market, particularly in neighbouring south east and east Asia, Japanese steel makers have no option left but to cut production. They have not done as much. If they continue to produce at the same rate, or even increase from now, there will be reasons for anyone to expect price drops at least in Asia. The situation in India is also not encouraging. After the strong first half last year, weaker investment in the economy is forcing steel demand down.

The flat steel prices are on a downslide in the European union. Export prices have also fallen depicting weaker domestic demand forcing domestic mills to desperately accept lower dollar prices. The situation is unlikely to change from now. Sharp drops in crude steel production in the region have been noted. The EU mills will perhaps reduce output faster in the coming months.

No significant change is expected in the middle east and Africa. The Latin American economies, in the face of the global economic slowdown, will see erosion in their steel consumption base. With lower world prices and lack of support from the US, the Latin American mills will also have to cut output to whatever extent possible.

The CIS steel consumption took an upturn mainly as a result of a Russian recovery. Although there is no ground to expect steel consumption in the region to drop from last year, production increases have continued, albeit at a slower pace. If the CIS production growth remains at about 3-4 per cent this year, they will have a lot of steel to sell in the world market, to make the pricing scenario extremely uncomfortable for the mills in the rest of the world.

On the whole, at the moment, the scenario is such that global flat steel prices will take another beating in the second half of the year. The finances of the steel mills are going to be dented by it. For many, bankruptcy is only a matter of time.

(The views expressed here are of the author.)