In May, China's steel output rose by 7.3% and is up by 8% in 2013 so far. That is in contrast to a 4.7% decline in the European Union, a 5% decline in North America and a 1.7% decline in the Commonwealth of Independent States.
On the face of it, a worsening global economic situation should spell bad news for steel producers, considering their fortunes are closely linked to this. But steel production data show a stable and even growing trend in output. The World Steel Association said crude steel output in May rose 2.6% and in January-May by 2.1%. That compares with 1.2% in April and 1% in March.
A country-wise break-up, however, explains the lack of congruence with the dismal news coming out of most economies. Inevitably so for steel, it is China that accounts for the increase in output. In the year until May, it accounted for 49.4% of total steel production. Its share of global output has risen by 2.6 percentage points, which is a substantial jump. This increase is explained by cuts in output in other parts of the world, even as China appears unwilling to join hands with the other steel-producing regions.
In May, China's steel output rose by 7.3% and is up by 8% in 2013 so far. That is in contrast to a 4.7% decline in the European Union, a 5% decline in North America and a 1.7% decline in the Commonwealth of Independent States. Other regions have been cutting output in response to slowing demand. China's growing steel output, in the face of a weaker domestic economic outlook, would mean that what it cannot sell locally will find its way to other countries. That is what may be putting pressure on prices and undoing the effect of supply cuts in regions such as Europe.
Since early April, Chinese domestic steel prices have declined by 9%, according to Bloomberg data. Despite China's growing steel output, iron ore prices are down 13.6%. A trend of declining iron ore prices and even coal prices is the one consolation the industry has. Falling raw material costs may provide some support to margins that are likely to come under pressure due to declining prices.
In India, the situation is not much better. Demand for finished steel was down by 0.8% in the first two months of the current fiscal. Output on the other hand was up by 3.1% and the industry resorted to higher exports as a result. But one key change in the steel industry's operating environment is the sharp depreciation in the rupee versus the dollar—10% since April.
While this makes imported raw materials expensive, it also adds to the landed cost of imported steel, which, in turn, gives companies protection from a drop in prices. It also makes exports more remunerative. Though currency deprecation may do some good at the operating level, currency volatility is also likely to play havoc with mark-to-market provisions and debt-related payments. A Deutsche Bank research report, for instance, estimated that Tata Steel Ltd's FY14 earnings per share can gain 23% if the rupee averages 58 to the dollar during the year.
Currency is a volatile peg to hang one's hopes on, but companies will welcome help from any corner in tough times such as these. The extent to which rupee depreciation can prove useful or otherwise will be visible in the next few quarterly results. Meanwhile, on the global stage, all eyes will continue to be on China to see if the country's steel output continues to trend up or adjusts downward so that steel prices can get some support from a narrower supply-demand gap.
Source: Livemint