Steel Prices to Plunge

On Friday, ThyssenKrupp, Europe's 4th largest steel maker said that it would cut steel production by 10% to "maintain prices" at current levels, as imports and inventories of the metal increased since the beginning of the year.

Mish says "Fat Chance".
Let's take a look:

India:
India fires up steel production. India's iron and steel industry seems poised to double its production in five years in response to an anticipated sharp rise in domestic demand. "Essar Steel is India's largest exporter for flat products and has been so for the last five year," says Essar boss Prashant Ruia. "We continue to maintain 30% to 40% export of all our products. Basically we are going from 3 million tonnes to 3.5 million tonnes over the next two years. Because of the vast reserves of iron ore and coal, many believe India has the potential to become one of the leading steel producers in the world", he says.

China:
China is now a major player in steel production. China has now become a major player in the global steel industry by contributing nearly 70 per cent of the world's increased output of 205.9 million tonnes in the last four years. It has contributed 140 million tonnes to the world's steel output increase since 2001.

"China's economy has entered a new growth period mainly powered by its heavy industry. During the past four years, the country's steel output growth has accounted for 70 per cent of the world's increased output of 205.9 million tonnes," said Wu Xichun, Chairman, China Iron and Steel Association (CISA).

Due to lack of specialization China rely heavily on imports for almost all steel products with high quality. This is because special and quality steel output accounts only for eight to 10 per cent of the country's total output.

Here is a nice boast:
"India can make steel much cheaper than China".

The pieces are all in place.
The world economy is slowing. China and India will soon be in a position of EXPORTING (not importing) high end steel products, and the global wage arbitrage is clear on this subject. China and India can produce steel far cheaper than can Germany or the US.

Yes China and India both will need mammoth supplies of steel to build their own infrastructure but both can maintain vital exports by maintaining sufficiently high export production levels to provide capital for domestic improvements.

Cutting production to "maintain prices" seldom works, especially when output is increasing elsewhere. This is just another part of the deflationary forces at play in the world economy of 2005 and beyond.

Mish