World Steel Production Remains Muted For Feb 2012

The World Steel Organisation recently released the steel production numbers for Feb 2012. The total world steel production grew by a mere 1.9% on a YoY basis to 119 million tonnes. This muted growth presents a weak picture of the global economy.

However, these numbers are better than those in Jan 2012, as the capacity utilisation went up in Feb 2012 and increased to 79.7%, 3.1 percentage points higher than that in Jan 2012. On a YoY basis however, the utilisation is still down by 2.8%. China, which is the key driving force behind the growth in the global steel output and is the world’s largest steel producing and consuming country, has improved its crude steel production to 55.9 Mn Tonne for Feb 2012, which was up by 3.3% as compared to Jan 2011.

However given the current liquidity situation and the slowdown in the construction and manufacturing sectors, we do not expect any major growth in the Chinese steel demand in 2012. The problem of oversupply will also persist over the year.  The China Iron and Steel Association had earlier said that the demand for steel this year would slow down to 5.7%, which is almost half the average growth rate of 11.1% over the past 3 years. China has also reduced its projected GDP growth rate to 7.5%, the lowest in the last 3 years. With the slowing economy, we expect steel demand growth to follow a similar trend in 2012.

The current situation of the housing and construction sector in China is not looking good either and this may result in lower demand. Severe market conditions such as reducing steel prices, intensifying over-supply, fluctuating raw material prices, strengthening of cost pressures and global price risks can all collectively impact the major steel players. The continued weak demand has resulted in an inventory pile-up for the steel companies, impacting the cash cycle and resulting in de-stocking of this inventory at lower prices. This ultimately impacts their margins.

As far as other countries go, Germany’s crude steel production for Feb 2012 was 3.6 Mn Tonne, a decrease of -3.1% as compared to Feb 2011. USA produced 7.3 Mn Tonne of crude steel in Feb 2012, up 8.5% on a YoY basis. Spain produced 1.2 Mn Tonne of crude steel in Feb 2012, which was -14.3% lower on a YoY basis.

We believe that the global slowdown in demand will continue in the coming quarters. Debt problems still persist at the door 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. Inflation has cooled off slightly and the interest rate has peaked out with the recent move of the RBI of reducing the CRR twice to improve the liquidity situation. We could see some pickup in demand in the coming quarter. Moreover, with the rupee getting appreciated from its peak level of Rs 53/USD to around Rs 50/USD, we can see some respite coming in for the major steel companies with respect to the forex losses and lower coking coal costs.

In the recent move to provide more support to the Indian steel industry, the government proposed to increase the import duty on flat rolled HR and CR products in the Union Budget. This move was to reduce the imports and hence, to give more pricing power to the domestic steel companies. On the other hand though, the increase in the excise duty rate from 10% to 12% has come as a negative factor for the steel companies, which were already facing the problems of high input costs of iron ore.

In any case, due to improving demand and the increase in the excise duty, in order to protect their margins, steel companies have increased the steel prices, which will help them to set off some of the cost in the coming quarter.