Crumbling steel industry: Light at the end of the tunnel?

By Dr B K Mukhopadhyay

All is not well in the steel sector! Global crude steel output totaled approximately 126.72 million tons in December, 2015, marking a drop of 110,000 tons from November and down 7 tons or 5 percent from December 2014, according to the World Steel Association. December, 2015 saw the lowest amount of crude steel produced in any month in 2015 and prior to 2015, this decade had also seen a month-on-month rise in production in December!!

Chi plans to cut steel production capacity by 100 million tonnes to 150 million tonnes over the next five years. Chi, with the top share of production in the world, has seen output fall significantly by 5.2 percent year on year in December. Output is down by more than 80 million tonnes (annualized), since last June and mills that are seeing expanding deficit and cash flow shortages have suspended production according to alysts, helping the overall industry with supply and demand imbalances in the long term.

The world’s largest steel maker Arcelor-Mittal reported an annual loss of close to $8 billion in 2015, forcing the shares of the group down over 6 percent to the bottom of the pan-European STOXX 600, adding to the 60 percent losses seen in the last year. Chi currently makes around half of the world’s steel and Mittal’s comments come as the European Union’s top trade official has urged Beijing to cut the overcapacity in its steel industry, according to reports this week, amid a deep crisis in the European industry. Alysts assessing the sector agree that output both inside and outside of Chi is showing signs of slowing and recent easing in Chinese policy further aimed at boosting the ailing construction sector in the country means 2016 could be the start of a turround for the industry.

U.K. based Tata Steel announced plans last month to cut another 1,050 jobs on top of the 1,200 jobs axed at the Indian owned group last October. Ratings agencies have also come down hard on steelmakers around the world, downgrading major firms including Arcelor-Mittal and U.S. Steel.

Actually, the last 12 months have been brutal for the steel industry, with prices falling to 12-year lows as currency headwinds; oversupply and dwindling demand prevail, resulting in mass job cuts in the sector.  Region wise, experts are bullish on Europe, where there are moves to reduce excess supply and where protectionist moves can be seen. They are also bullish on the U.S., where prices are finding support in protectionist moves. While for India the feeling is positive due to long term growth outlook, but the picture is bearish on Chi and Latin America due to the weak fundamentals.

The importance is sky high

Innovation in steel has been helping human civilization to smash through new barriers, strengthen our lives, and hit new heights. Recently, the Dutch company MX3D has embarked upon an innovative project to construct a steeled hanging-bridge over an Amsterdam cal using a 3-D printer. South America’s tallest structure Amazon Tall Tower Observatory (ATTO) stands in the heart of Brazil’s Amazon rainforest. The steeled structure is located about 170 km northeast of the Brazilian city of Maus and reaches a height of 325 metres - 25 metres taller than the Eiffel Tower.

Globally, an increasing number of taller and more striking skyscrapers are being designed and built in Dubai, Shanghai, New York, London, Moscow and elsewhere. The world’s major cities are giving clear indications that the race to reach new heights is on. In South Korea, researchers at Pohang University of Science and Technology have developed lightweight steel as strong and ductile as the titanium! In Saudi Arabia’s coastal city of Jeddah, the construction of the world’s tallest building is underway – the Kingdom Tower is expected to be completed in five years requiring an estimated 80,000 tonnes of steel.

Plus, Emirates Steel is taking part in an innovative and ambitious project in the United Arab Emirates (UAE) - to capture, use and store 800,000 tonnes of carbon-dioxide (CO2) per annum from its steel plant. Scheduled to be completed by 2016, the project’s goal is to produce steel with a lower CO2 emission to the atmosphere - capture the CO2 generated from the production of iron and steel; inject it into existing oilfields for enhanced oil recovery (EOR); and store it at the same time.

Good going still to be witnessed

Currently, Chi’s steel consumption is roughly half of the world’s total. However, it is forecast that Chi’s annual demand for steel will continue falling until 2017 and settle at approximately 10 per cent below its high-water mark. With so much excess capacity this year, Chi is likely to ship more of the metal abroad than Japan (world’s second-biggest steel producer) could make, if its steel mills run at full capacity.

India and South Korea, ranked respectively fourth and fifth in global steel production, imposed ‘anti-dumping’ duties to repel Chinese imports.

Nevertheless, it seems that Chi’s enormous appetite for steel has sustained Australian growth over the past decade. Australia is the world’s biggest exporter of iron ore – the main ingredient in steel production. Perhaps, those ‘fat years’ are virtually over due to a steady decrease in Chinese investments.

Iron ore prices are almost two-thirds lower than two years ago, although Australia had assumed that Chi would sustain its ultra-fast growth. Regardless, Australian miners have less to fret about than do steelmakers in Japan, India and South Korea. As steel prices fall, Australia’s biggest mining companies are using their high-quality, low-cost iron ore to take a bigger slice of the global market.

India: A force to reckon with

The demand for steel in India and Southeast Asia has already increased despite being far from enough to replace the Chinese shortfall. Clearly, the declining value of Australian exports has become a drag on growth as mining companies cut costs and cancel projects. The eventual impact on the economy could be even worse.

Today, India is the fourth-largest steel producer in the world as well as the world’s largest producer of Direct Reduced Iron (DRI) or sponge iron. The steel sector contributes nearly 2.0 per cent of the country’s gross domestic product (GDP) and employs over 600,000 people. With $607 million investment per million ton of additiol capacity, the steel sector is expected to witness an estimated investment of $132 billion by 2020.

Still, India continues to be a low steel-consuming country at only 60 kg per capita compared to the intertiol average of 216 kg. Despite the low consumption, India’s per capita consumption of total finished steel has risen from 51 kg in 2009-2010 to around 60 kg in 2013-2014 - this indicates a huge growth potential for the country’s steel industry. This year, India’s import of iron and steel has risen at 58 per cent while making it the country’s sixth-largest import.

Meanwhile, the Organization of Economic Cooperation and Development (OECD) has cautioned of growing risks to the intertiol steel market. While global demand for steel would continue to expand favorably, growing economic risks associated with housing market and other problems partially cloud the outlook. Rising capacity expansions could impact on the price if demand growth slows down significantly. Since the capacity expansion continues to exist, trade friction to the detriment of the steel industry’s productivity has been indicated - due to an abrupt slowdown in global demand.

(The writer, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, Director, Netaji Subhas Institute of Business Magement, Jharkhand, can be reached at m.bibhas@gmail.com)