No steel producer in the global market can claim to be in a comfortable position since the financial crisis. What changed post 2008 ?
The two biggest drivers of steel industry performance are : one, the steel prices, the most important of the two; and, two, the volumes; the two are related. Because it is essentially the demand that drives the prices up and creates volumes; volumes mean more sales, volumes mean lower costs.
Steel Demand India
The problem with demand for steel is that it is cyclical; but it is more than cyclical. This becomes obvious if one dissects the demand into its two major components – the lesser of the two, the demand for flats from the consumer durables industry, which includes the automobile sector; and the greater of the two,more than 65% of the total, the demand for longs from the construction industry – dams, bridges, ports and airports, railways, industrial plants, the housing, etc. The former demand is very much cyclical, usually; it goes through booms and busts of consumer spending.
The latter is worse. It happens in spurts. A good illustration is the long-term historical domestic demand for steel in South Africa, as shown in the beautiful graphic presented by NkuNyembezi-Heita, CEO of Arcelor Mittal, SA.
Ideally the consumer durables demand, with its short and shallow cycles, has to provide a cushion for the steel industry as the demand from the construction industry shrinks. The worst is when the trough of the consumer durables cycle coincides with the dip in the other demand.
Steel Industry in India
But a bigger problem of the steel industry is sustaining the capacity during the sharp dips, so that it can capture the opportunities and scale up the supply in a very short time when the spurts happen, for these too are sharp;the problem is aggravated by the fact that the fixed costs in this industry are relatively high. One country that has managed to ‘manage’ this problem to a large extent is China, by ‘managing’ the demand from the construction industry. But the big question is how long can such demand be sustained ? The chinks in the strategy are already visible.