The global steel industry had been ailing over the last few years, plagued by fragmentation, over capacity and global economic slowdown. Moreover, the September 11 attacks came at a time of declining global trade. World trade grew by less than 1% in terms of volume of world total exports in 2001, a significant decline from growth of over 11% witnessed in 2000. This collapse in growth of international trade was aggravated by the 9/11 attack. However, respite seems in sight. According to leading organisations like OECD and IMF, world economies are set to improve in 2003 led by the US and Europe. Steel being a core sector, any improvement ought to be reflected in this sector.
The world at large is grappling with problems relating to the steel industry. The global steel scenario is highly fragmented in nature. The chart below shows the fact that the top 5 steel producing companies control only about 15-16% of the world market. As a result of this fragmentation, steel companies are unable to achieve higher operating margins, which is currently around 5-6% as compared to aluminum (approx. 12%), copper (approx. 17%) and cement (approx. 27%). However, in the latter industries, the fact that the top 5 companies control around 45-50% of the world market must be taken into consideration
The other reason for the lower operating margins in the steel industry is the chronic overcapacity that the industry is facing currently. The global steel consumption in 2002 is estimated around 784 MT, while the capacity is about 1,034 MT. This overcapacity of over 200 MT is likely to keep the pressure on price.
These issues saw steel prices dip to 20-year lows in January 2002. Dipping prices and lower realizations made the US steel industry pressure the government for protection against steel dumping nations (especially EU countries). As a result of this, the US government passed the anti-dumping law against steel exporting countries to the US.
This step by the US government worked as a boon for the Indian steel industry, particularly for players like TISCO and SAIL. India did not get affected by this law owing to its ‘developing nation’ status. Also, US steel imports from India did not cross 3% of total US imports. India could continue to export to the US and earn better realizations, as prices in US were comparatively higher on the back of protection given to the US steel industry which had shifted the supply demand equation in favour of the suppliers. TISCO’s exports were up by 94% in 1HFY03 (US$ 105 m) as compared to 1HFY02 (US$ 54 m).
Of course, apart from export growth, developments on the domestic shores cannot be overlooked. Demand from automobile and consumer goods sectors, and also government’s infrastructure drive, all contributed to the bottomline of Indian steel companies. The dual benefits (both domestic and exports) saw stock prices of both these companies rising in the last one-year.
Going forward, positive developments are likely to show up in the global steel industry also. In a meeting among steel exporting countries in Paris last December, they identified overcapacity of some 125 MT in the global steel market and have agreed tentatively to make a cut in production capacities by the end of 2005. If this happens, it could provide some relief to the ailing steel industry.
Also, the big 3 in steel consumption i.e. China, EU (15) and US, who consume over 50% of world steel, are expected to see an improvement in economic growth and consequently benefit the industry. With the improvement of the Russian economy, the steel from the CIS countries is being absorbed by the region itself, which leaves very little for export to the rest of the world. Also, China is likely to increase its imports since the country has started huge construction projects in preparation for the Olympics.
Going by this, in the foreseeable future steel prices will remain stable if not go up further. Steel companies will continue to reset their current debt at lower interest rates and reduction in employee costs, as a result of VRS, will continue to positively affect their bottomlines’.