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Steel industry gloom is being overdone
January 2002
MEPS International continues to be quite bullish about long term steel demand worldwide. The analysis from their latest five year forecast for world iron and steel production shows that global consumption to 2006 will be higher than the trend recorded in the final decade of the last century. 2002 is likely to be another poor year for the industry. However, if past tendencies are examined, the recovery should commence in 2003 and pick up in intensity in subsequent years.
The main problems of the industry are not on the demand side. Many of the difficulties were created by the suppliers. Most of them have been parochial in their assessment of demand to justify investment decisions. In recent years, the mills operating in regions with a deficit of production, have installed considerable amounts of new capacity - substantiated by an attempt to become self sufficient in manufacture. These steelmakers have completely ignored the fact that a steel surplus of 70 million tonnes is generated in other areas of the world - i.e. in Japan, former USSR and South America. This cannot be removed without inflicting serious financial difficulties on the mills in these regions.
The current crisis in the corporate sector was inevitable. A quote from last year's issue from MEPS states - "The substantial overcapacity will plague the industry for years to come. World prices have been steadily eroded over the past fifteen years. This situation will continue for the next five unless attitudes to investment in new equipment are changed". The speed of the onset of the predicament has, however, surprised MEPS. This has been partially brought about by the decline in industrial demand in the US and the "knock-on" effect around the world. The high value of the US Dollar has also been a strong contributory factor - resulting in steel prices in many parts of the globe being significantly lower than those in the United States.
Action to reduce capacity would obviously improve the situation. It is estimated that current manned production capability in the world at approximately 900 million tonnes. This value has been calculated from the highest monthly steel output in all the main producing countries during the past three years. Our forecast for steel demand indicates that this level of output will not be required until 2005. It is easy to see why negotiators at the recent OECD meetings are prepared to concede 100 million tonnes of plant closures from the reported 1070 million tonnes of technical capacity. Most of it would be obsolete equipment and, therefore, not diminish the current oversupply situation.
The main thrust should be to gain agreement to curb future new installations planned purely to achieve self sufficiency in manufacture. Governments and the main lending agencies should be urged to resist requests for funding new capacity. Output capability will increase naturally as a result of refurbishment and upgrades of existing plant and equipment. These could satisfy half the extra demand each year.
Mergers, acquisitions and company reorganisation should be encouraged. Manned capacity cuts can only be realistically gained in an environment in which an organisation can see cost benefits from consolidating two or more productive units.
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