Poor consumption narrowing margins of steel cos: Expert

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Poor consumption narrowing margins of steel cos: Expert

The steel sector across the globe is experiencing a slowdown in consumption. However, production continues at the same pace which creates a gap pushing steel prices down. In an exclusive interview with CNBC-TV18, Roger Manser, Consultant, Steel Business Briefing says that he expects this trend to continue till the end of the year.

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The steel sector across the globe is experiencing a slowdown in consumption. However, production continues at the same pace which creates a gap pushing steel prices down. In an exclusive interview with CNBC-TV18, Roger Manser, Consultant, Steel Business Briefing says that he expects this trend to continue till the end of the year.

"Crude steel is in surplus and that is putting a downward pressure on prices. There may be some improvement in steel prices say in October-November, but towards the end of the year, we do expect a downward pressure on steel prices" he said. According to him, this fall in steel prices and the rising price of raw materials like iron ore and coking coal are pressurizing the margins of steel companies.

Talking about the steel sector in India, Maser says that he doesn't see high level of growth in domestic steel consumption within the country. Therefore, Indian steel companies will continue to export their finished goods. "As the government is looking to control the economy, we don't see domestic steel consumption in India growing as fast as it could" he added.

Below is an edited transcript of his interview with Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video.

Q: Can you assess for us the situation globally? There are some reports which say that there is slowdown in China. How do you assess the demand supply situation for steel and how do you see prices trending?

A: Well I think first of all the forecast that we have seen so far global steel consumption for 2011 show a much lower figure of around 6% growth in steel consumption for 2011. The danger at the moment is that global steel production is running well ahead of steel consumption. Steel consumption is at 5-6% and global production is at 8%.

So there is far too much steel being produced in the world at the moment. Crude steel is in surplus and that is putting a downward pressure on prices and we expect that to continue for much of the rest of this year. There may be some improvement in steel prices say in October-November, but towards the end of the year we do expect a downward pressure on steel prices.

Q: What we have observed that iron ore prices have risen to nearly USD 15-20 over the past few weeks. How do you see them trending? Do you expect further increases and if that is the case, how will margins of steel companies be impacted?

A: Iron ore prices will remain very firm because of Chinese production or you might even say Chinese over production in the coming few months. So I do see little change in iron ore prices, maybe even some small increase of USD 5-10 in the coming weeks in iron ore prices. I think there will also be an increase in coking coal prices as well, particularly with upsets in the weather pattern in Australia, in Queensland towards the end of this year.

So both iron ore and coking coal prices are likely to remain reasonably firm and that will put considerable pressure on the producers. It's squeezing the producers because the prices are quite low, oil prices are softening but their costs are increasing. So we do see some narrowing of margins as far as the steel producers are concerned.

Q: What do you mean by coking coal prices are going to be reasonably firm? The prices currently stand at somewhere around USD 315 levels or so. Is there a possibility of it correcting below the USD 300 mark say in the next couple of months?

A: I think that that is possible on the contract prices, but I do see the spot prices increasing. Contract prices may soften a little bit in the fourth quarter to below USD 300 a ton. But for good quality coal, the spot price will probably increase as we go forward towards the end of the year.

Q: Well that's an interesting thing because even in India we are seeing a similar kind of steel consumption of approximately 1.5% against a production which is quite high at around 8-9%. What have you made of this production consumption gap and how do you see it pan out from here?

A: Well, certainly I think that Indian steel producers such as JSW and others have been heavily investing in crude steel production because they anticipate very high levels of growth in Indian domestic consumption of steel. However, up to date we have not seen such a high level of growth in domestic steel consumption within India. So companies like JSW Steel and others have been looking to export various steel products into Europe, Middle East, China etc. So long as production runs ahead of consumption within India, we expect to see India continue to be a major exporter of finished steel products.

How fast steel consumption will grow in India in lets say the next two-three years remains a difficult question because there are credit restrictions in India. You are trying to control your inflation and so long as the government is looking to control the economy in this way, we don't see domestic steel consumption in India growing as fast as it could.