Steel production in China falls on lower demand

Emerging global giant China, is now feeling the heat of the mess in the western countries, which has now transformed into a full-blown crisis. The world's 2nd-largest economy grew by 9.1% in the 3rd quarter, against 9.5% in the 2nd quarter, the slowest pace since 2009. The slowdown in growth was mainly because of monetary tightening by the Chinese government in a bid to tame inflation. Lower exports and declining demand for steel also contributed to lower GDP growth.

China is the largest steel producing country, contributes 42% to the world's steel production. However, as per the news reported by the Wall Street Journal, the country has recorded a decline in steel production in Nov 2011. Production fell by 8% during the month to 49.9 MT, compared to 54.7 MT a month earlier, a 0.2% fall on YoY basis. The crude steel production fell to the lowest level in the last 14 months, as the slowdown in the economy and monetary tightening battered the demand, leading to a cut in the prices.

The decline in Chinese steel production clearly indicates the slowdown in demand all over the globe. This was inevitable, as developed economies around the world are going through a slowdown.

The impact on the steel industry globally and in India

Steel is a global commodity, and a slowdown in demand will lead the steel players to cut prices. Prices have already fallen in the international market over the last 3 months. Moreover, we can see a further decline due to a slowdown in Chinese demand in Nov 2011. The impact of this will be seen domestically as well.

Despite the slowdown in demand, Indian steel players have kept the steel product prices high, largely on account of rupee depreciation and production cuts. With international prices moving downwards, it will be impossible for the players to keep the prices high as compared to the international prices.

With falling steel prices, coupled with high raw material prices and higher interest costs, the margins of steel producing companies will come under pressure. Overall, the outlook for the industry in the current year and the next one doesn’t look good, as the slowdown in demand is expected to continue. The hike in interest rates and monetary tightening by the RBI will have its lag effect in the coming years.