- 16
- AUG
- 2012
Steel a march: why low prices may worry buyers
Author: Jonathan Webb - Categories: Risk
Procurement people tend to be a predictable bunch. Give them a bit of price transparency here and a few cut costs there and they are happy.
Steel buyers for instance, will be pleased as punch with the significant declines in the price of the commodity. Indeed, the value of the metal has fallen from $912/tonne in March 2011 to $734 in July of this year. Automotive companies for example should enjoy some improved margins in an increasingly competitive industry.
But there have been some muttered concerns about the recent drop in the price of steel. One industry’s gain is another’s loss.
How do we interpret these figures and what do they mean for business?
Kaushik Chatterjee, CFO at Tata Steel claims that their recently reported collapse in profits is primarily attributable to a fall in global demand. The most noticeable customer is China, whose leviathan steelworks have been unusually quiet as late.
With disappointed investors, it is perhaps predictable that t steel producing company would explain away its poor results by pointing to external factors. But there is something substantial in Chatterlee’s assertions.
Many believe steel to be a bell-weather commodity. Capital intensive industries such as automotive, ship-building and most importantly construction all make heavy use of steel. Indeed, the PIU’s report on the commodity found that the construction industry accounts for 49% of global demand.
The fate of these sectors is tightly aligned to the overall health of the economy, specifically finance and the ease of credit.
There have been a number of pessimistic reports emerging from China relating to its misfiring financial institutions. There are thoughts that the wunderkind of modern economic success – the country that has miraculously avoided numerous recessions and consistently recorded astronomic levels of growth – is now starting to lose its lustre.
BHP Billiton has already announced job losses in its Australian facilities as a consequence of the diminished industrial activity in China. And with these recent figures confirming the real effect of dropping GDP growth figures, we can expect similar moves from other industries to come.
It is important to remember that the current economy – and most growth activities – is built on steel. Although cheap steel may be good for margins in the short term, low demand may be a dark indicator of the future.
