Falling prices leave steel companies deep in the red

17 February 2016

The most disturbing feature of the world steel industry, which gives a good insight into the state of global economy, in 2015 was prices falling to their lowest in a decade. That hot-rolled coil prices have risen by about a 10th so far this year brings little relief to steelmakers.

Near-term steel outlook remains uninspiring. The disturbing phenomenon for which China, which accounts for nearly half of global steel production, is largely responsible is due to supply staying in excess of what the market could absorb.

The 2.8 per cent contraction in world steel output at 1.62 billion tonnes last year that happened for the first time since 2009 was not enough to stir the market as industrial production and construction activities in major and emerging economies remained lacklustre.

To accentuate the problem, China in spite of producing 2.3 per cent less steel at 803.8 million tonnes (mt) became an aggressive seller in the world market in the face of waning domestic demand particularly from construction and housing sectors.

Last year saw China's steel exports rising 20 per cent to 112.4 mt provoking many countries hosting bruised steel industries to invoke trade defences from minimum imports price (MIP) to anti-dumping duty. Incidentally, China's exports were 105.2 mt output in Japan, where production fell 5 per cent.

No wonder, the difficult steel market inflicted a record loss of $7.9 billion on ArcelorMittal, the world's largest steel producer with manufacturing presence in five continents. The loss includes impairment charges of $4.8 billion mostly on mining assets that suffered value erosion.

The Lex column in Financial Times says: "Given that losses have eaten away the company's equity over five years, bolstering its balance sheet is sensible." The reference is to ArcelorMittal's announcement of a $3 billion rights equity issue in which the Mittal family, which has a 37.4 per cent stake in the company, will fully participate.

Things for ArcelorMittal are to get worse as guidance of $4.5 billion earnings before interest, tax, depreciation and amortisation in 2016 will leave it in net loss for five years in a row. The company's shares have received resounding thumbs down in the past year with the price down 60 per cent.

Referring to the challenge China faces in restructuring its steel industry to a "lower growth economy," chairman Lakshmi Mittal finds the news of capacity closures in that country "somewhat" encouraging.

China has reportedly eliminated 95 mt capacity since 2010 and it might dump another 150 mt capacity, mostly environment damaging small mills, in the next five-to-seven years. That some restructuring is finally happening, there is good news for every other steel-making country.

China is expected to make 2.2 per cent less steel in 2016 when local demand, according to World Steel Association, is to shrink two per cent on the back of a 3.5 per cent fall in 2015. Much global hope is resting on the possibility of production fall reining in Chinese exports.

An Accenture official told Financial Times: "Were this to happen, the modest demand growth increases forecast for the US, the EU (European Union) and other markets should support operating rate increases and somewhat higher prices." What, however, will limit steel price rises are low prices of raw materials.

Goldman Sachs says in a report if Beijing's announced steel capacity cutback plan resulting in production fall of up to 95 mt materialises, that will be an additional pressure point for iron ore, which is hovering around $40 a tonne. Mittal thinks there will be little material change in steel situation in 2016 and this finds resonance among steelmakers across the globe.

A combination of steadily falling prices and high imports sunk Indian steel leaders from Tata Steel to JSW to SAIL to big losses in the third quarter of 2015-16. In the first 10 months of 2015-16, steel consumption here was up 4.2 per cent to 65.91 mt.

This would have called for some celebration hadn't imports during the period risen 24.1 per cent to 9.3 mt. Hopefully, MIP ranging from $341 to $752 a tonne on 173 steel products will improve the steel scene here. The industry has a debt burden of close to Rs 3 lakh crore.

In the industry's present condition, many of its constituents are not able to service bank loans. Quite a few have already moved in the sick bay and more are likely to join.


Source : business-standard.com