World Steel Production Slows Down In Jan 2012

The situation for the steel sector across the world doesn’t seem to have improved much in the last one month. This can be proved from the production numbers for the January month published by the World Steel Organisation. The production in January has fallen by 8 per cent to 117 million tonnes. This indicates that due to subdued demand most of the steel players across the globe have gone for a production cut.

Further, if we look at the steel capacity utilisation ratio of steel companies across the globe in January 2012, it has improved by 0.5 per cent at 71.3 per cent compared to December 2011. However, on a YoY basis the utilisation ratio in January 2012 decreased by 9.6 percentage points. 

Continued weak demand has resulted into an inventory pile-up for the steel companies, thus impacting the cash cycle and resulting in a de-stocking of this inventory at lower prices which will ultimately impact their margins.

China, key driving force behind the growth in global steel output and the world’s largest steel producing and consuming country, has seen a decline of 13 per cent in its crude steel production for January 2012 which stood at 52.1 Million tonnes as compared to January 2011. Germany’s crude steel production for January 2012 was 3.4 Million tonnes, a decrease of -8.5 per cent as compared to January 2011.

Also, the current situation of the housing and construction sector in China is not looking quite good which can result into lower demand. Severe market conditions such as reducing steel prices, intensifying over-supply, fluctuating raw material prices, strengthening of the cost pressure and a global price risk all this can collectively impact the major steel players

We believe that the slowdown in demand globally will continue in the coming quarters. Debt problems still persist at the outset of the major economies. High inventory pile-up and subdued demand will lead to price pressures internationally.

In the meantime, the domestic market may remain better off in the coming quarter as inflation is slowing down and the interest rate is getting peaked out after the CRR cut of 50 bps by the RBI. We can see some pick-up in demand in the coming quarter. Moreover, with the rupee getting appreciated from its peak level of Rs 53 per USD to Rs 49 per USD levels we can see some respite coming in for the major steel companies on the forex losses and lower coking coal cost.