Steel Industry Global Slowdown – The Real Problem Behind It
Posted in Finance Articles, Total Reads: 685
, Published on 14 May 2016
Global slowdown in steel industry is now not a hidden fact. Daily updates on steel industry highlighting the bad phase of steel industry in 50 years. If we go 50 years back, then what data shows is that during 1950-73 period, crude steel production registered a CAGR of 5.8%. But during 1974-2001 period, steel production went through the stagnant growth of 0.7% CAGR. Then came the golden era of production, during 2002-2007 crude steel production grown at the rate of record 8.4% CAGR.
If we analyze the region wise steel consumption break up, then what we get to know is that, China is the global leader in steel consumption. 46% of total steel is consumed in China itself. Then comes the Rest of the World (ROW) with 28%, EU with 10%, US with 7%, India with 5% and Japan with 4% of the total steel consumption.
Now if we analyze the figures of region wise steel production break up, then what we find is that, China is the global leader not in consumption but as well as in production also. In 2014, China steel production was about 49%, while other countries and regions were far behind China. US production registered with 5% which was almost similar to India’s production of 5%. Japan’s production with 4%.
So what we are trying to connect here with the above mentioned figures is the reasons for global slowdown in steel industry. China with top market leader in both production and consumption that if a Chinese economy goes into a downturn then it will directly affect the steel industry, and such is the current situation steel industry is facing.
Chinese economy is currently facing the heat with gradual slowdown and declining market. Chinese steel market has passed the boom stage. Still the country remains the largest consumer of steel, but with expected demand of 0.5% over the next coming period, which is far behind the registered 5.2% CAGR over the past five years. Now the current Chinese market is in transforming stage, government is trying to transform the investment driven structure to consumption driven one. This would certainly pull down steel consumption in the country because investment driven structure focuses on investments on infrastructure and construction projects, which requires high steel intensity. Less investment on such projects will certainly lead to lower consumption of steel.
If we see the sector wise break up of steel consumption in China, then we find that, construction sector uses 62% steel output. For the past five years Chinese investment in the field of infrastructure and construction seen the tremendous inflow. Which not only help steel industry, but it grown quite tremendously. For cooling down the real estate market and also to check the home prices, Chinese government have taken certain measures which not only check the growth but also broken the growth momentum on a decade long boom in real estate industry.
Key initiatives by government are as follows;
• Limitation on multiple purchase of home by an individual.
• Strict mortgage rule, higher down payment requirement.
• Introduction of property tax
• Pressure on local government in making the rule stringent, making it difficult for foreign investment.
Another reason for such a downturn in steel industry, is the huge demand supply gap. As still China is the top consumer and producer of steel in the world, so it can meet its lower demand of steel with the help of their own domestic production. Despite the lower demand, China continued his steel production with the same rate and started dumping their unwanted steel to other market, which forces rival to close their plants and put thousands of people jobless. Chinese steel export rose by 27%. Huge export from China making life of steel producers elsewhere difficult. Recent example is quite visible when Indian steel giant Tata, put their entire London unit up for sale, blaming cheap supply of steel from Chinese market.
Indian steel industry also facing such cheap supply issue from China. The second half of 2014-15 fiscal year seen the higher steel import and lower realization. Steep decline in the price of steel and huge gap between the landed cost and domestically manufactured steel, rising imports and subdued demand growth pressured the price of domestic manufactured steel. To tackle such situation, Indian government introduced a levy of minimum import price (MIP). The government hiked the custom duty on imports twice, by 2.5% each, in June and August 2015 and also imposed 20% provisional safeguard duty on Hot Rolled (HR) coil imports in September 2015. This changes came to protect domestic steel industry.
Input cost in steel manufacturing is on souring lower side. Global iron ore and coking coal prices to decline further. The iron ore spot prices declined to 43% to $55 per tonne, coking coal prices fell 19% to $ 102 per tonne. Such a lower demand will lead to higher manufacturing of steel and ultimately will lead to wider gap between supply and demand. Higher manufacturing will also lead to oversupply of steel and will certainly affect the competitive prices of steel in the market.
Weak demand, over supply and lower input costs are the main parameters behind the stagnant and poor phase of current steel industry.
This article has been authored by Rahul Burman from IIM Kashipur
1. World Association of Steel
2. CNN Money
If you are interested in writing articles for us, Submit Here