Till the last month, both price and demand curves were heading north and the iron and steel industry was very happily sailing ahead. Suddenly winds changed their direction. Black clouds started gathering and the whole industry sentiment changed. What really happened ? Why this unexpected dive ? Lets analyse.
It is a well-known theory that a rising price curve will not interfere in the demand curve up to a certain level but after that demand curve is not able to carry the price weight on its shoulders and still climb up. It starts falling. I do agree that the rising raw material prices have pushed the finished steel prices up but now I think it has crossed the limit and reached the threshold. The demand can no more carry its burden.
I can also see another reason. To improve the yearly performance and to achieve the targets, steel mills have done a record dispatch in the month of March. Thus there is a lot of material in the market which has naturally reduced the appetite. This is a yearly phenomenon and every year the month of April is usually dull.
The third reason being the Ukraine-Russia war which has disrupted logistic chain at many places. This has influenced the movement of raw materials as well as the finished steel in many sea routes. Today the availability of ships and containers is also an issue. This has increased the freight charges which again has a depressing effect on the demand.
The last reason is of course China. As we all know, China is the single country producing and consuming around half of the world’s steel. Any shift in Chinese market is sure to have a multiplying effect on the world. Today, there is a re-occurrence of Covid pandemic in China. Many cities are under lockdown and this has also affected steel production and the consumption in China, in tern affecting the global steel industry dynamics.
What lies next ? I think the inventory in the market will get cleared in a month or two and its negative effect on the demand will get neutralized. What is more worrisome is the raw material prices and logistics. Firstly, the war between Ukraine and Russia is showing no signs of stoppage. Even if the war is being fought between two countries, many countries, lobbies are helping these war bound countries and indirectly fueling the crisis and prolonging the war. There is a possibility that few other countries may jump into the war. If this happens, the war may continue for a longer time. Lastly, even if the war stops tomorrow, it is foolish to expect the raw material price correction to happen instantly. It will take at least 4 to 5 months to secure and restore the production facilities. Logistic disruptions too need to be worked on and this is going to eat some more time.
Finally I feel it will take around six months for the industry to normalize after the war is stopped. Friends, be prepared for an extended challenging period.