Tough times ahead for steelmakers

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30 Dec 2008

FT has highlighted that the suddenness of the fall in steel demand in recent months has left many of the industry’s bosses in a state of shock and there are few obvious signs that the outlook is going to get better in the immediate future. Many steelmakers have been quick to make temporary production cuts since the start of the downturn, but few have taken more radical measures such as shutting their plants or axing permanent jobs.
But although the industry is in its worst state since steel prices hit rock bottom towards the end of 2001, some industry observers believe there are a few bright spots on the horizon.
Mr John Lichtenstein head of the metals industry group at Accenture thinks that the next few years need not be unremittingly grim. Mr Lichtenstein said that "The speed and decisiveness of the cutbacks in production by big steelmakers have been unprecedented, which means profitability in this downturn for the steel industry is likely to hold up better than in other comparable periods. By controlling supply better than in previous downturns, steel companies should be in a better position to keep prices at fairly high levels and so guard against too steep a fall in earnings.”
Mr Michael Shillaker analyst at Credit Suisse said that “The scope for cutting costs through reducing employment may be less in the steel business than in other industrial sectors. This is due to the highly capital intensive nature of most steel production. However, some onlookers believe that if trading conditions fail to brighten after the second quarter then job losses in the steel sector could begin to mount later in 2009.”
Mr Rod Beddows CEO of Hatch Corporate Finance does not attempt to downplay the difficult period for the sector. He reckons the steel business should be bracing itself for a sharp downturn with a period of four years between the sector returning to the level of output and demand it experienced in the first half of 2008.
Mr Matthias Hellstern, who monitors the European steel industry on behalf of Moody’s, the credit ratings agency, is slightly gloomier. He said that any upturn that comes later in 2009, perhaps around the second or third quarters, will be extremely mild.
Backing up this argument is research from MEPS, which expects average prices of all steel grades sold worldwide to climb marginally over the next few months, rather than continue the steep falls that started in July. According to MEPS, average steel prices should rise to USD 750 a tonne by July 2009, from a low point of USD 676 a tonne seen earlier this month.
Some observers think it could take four or 5 years for world steel production to regain the level of 1.34 billion tonnes reached in 2007. This would make the duration of the slump for steel one of the worst of the past 100 years, leaving aside, periods when the world economy was disrupted by global wars.

Source: Financial Times