iron. iron. iron.

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    Found this on another website - really worth a read for those thinking of investing in iron or steel.

    Steel producers bet on new market dynamics

    `For the next 10 years, steel prices are going to be higher than the ones obtained in the last 10 years.'

    THE SUNSHINE days are here again for the Indian steel industry. A combination of factors appears to be working to push it on to a higher orbit. If the steel producers are grinning, consumers at large are wearing a grim look. The way the industry is slowly moving into a new era, chances are that prices will head only one way - northward.

    In the emerging global scene, experts predict a shift in steel use away from the developed world towards populous nations like China and India.

    B. Muthuraman, Managing Director of Tata Steel, is convinced that the steel dynamics will witness a dramatic change in the next 25-30 years. A quick recap will be in order before taking a peep into the future.

    Steel making has come a long way since its commercial production in 1856. In the first six decades of the last century, there was only an upward movement in steel consumption. The growth averaged around 7-8 per cent a year. Subsequently, the growth rate halved over the next 30 years. From 1980 to until a couple of years ago, the rate slumped further and was hovering just around 2 per cent.

    Saturation in U.S.

    The reasons for the slide are not far to seek. The slowdown is primarily explained by the fact that the per capita steel use in the developed countries has settled down to the sustainable level of around 300 kg. "The U.S. does not build any more houses. By this, I do not mean that no houses are being built. I mean they are building very few houses. This is because the population increases in that country is marginal. So, very few houses, bridges and roads are getting built,'' Mr. Muthuraman says. Major U.S. steel consumption is in consumer durables such as cars, refrigerators and domestic appliances.

    Even in a developed economy, the sustainable level of consumption is only 300 kg per person. "When a country is in infrastructure creation mode, the per capita consumption goes above 300 kg to even 1,000 kg and then comes down and remains stable around 300 kg,'' Mr. Muthuraman points out.

    Given the fact that even in an advanced nation the sustainable level of per capita consumption is 300 kg, the six billion people in the world should be consuming close to two billion tonnes of steel. At the moment, however, the global steel consumption is just half of this. How do we scale the potential? This can happen if countries across the globe can scale the quality levels obtaining in the developed nations like the U.S., Japan and Europe. Even if a nation reaches that level, a steel consumption of 300 kg per person may still be required. If the population rises, the demand can go beyond the two billion tonne estimate.

    The U.S, Europe, South Korea and Japan may have hit the dead-end vis-a-vis infrastructure growth. Further, they do not have a great people size to drive steel consumption further up. "The U.S. population is about 300 million. Europe has 300 million. Japan has 120 million or so. With such populations, the infrastructure creation gets completed quickly. And, a stable level of consumption is reached,'' points out Mr. Muthuraman.

    After these nations reached a stable level, China is now on the upsurge. Chinese consumption of steel this year is slated to be in the vicinity of 290 million tonnes for a population of 1.3 billion people. This works out to a per capita consumption of 220 kg. A sizable part of China is still backward. So, there is huge scope for per capita steel consumption to go up substantially. "I can tell you that it may reach 600-700 kg in the next 15-20 years. It will then settle down to 300 kg,'' predicts the Tata Steel Managing Director. Ipso facto, he feels that ``the steel consumption... and economic prosperity in the world has now shifted to more populous countries. Therefore, the rate of growth that was there in the early part of the last century is going to repeat itself now.''

    Pick-up in growth rate

    In the last three years, the average growth in consumption of steel has been more than 5 per cent. For April-October this year, the consumption is in the region of 8 per cent year-on-year. "This is the first time in 35 years that we have seen three successive years where consumption has grown beyond five per cent,'' he says. This is an indication of the shape of things to come. Nations with population-intensity is beginning to consume more steel on their way to reach prosperity. This is visible in China. It is just waiting to happen in India. So for the next few years, Mr. Muthuraman presages, the average growth in global consumption of steel will be in the region of 4-5 per cent. A 4-5 per cent annual growth in consumption of steel on a base of 1,000 million people is quite extraordinary.

    Scope for new capacity

    Given the history of the past century, he expects the steel units to exercise prudence while adding capacities. This can also have a bearing on future prices. In fact, Mr.Muthuraman predicts a major overhaul of the price structure in the industry. Steel is made in two ways — either via the integrated process or through the electric arc furnace route. Electric arc furnace steel making depends on scrap. Scrap comes from two sources — one from the integrated steel plants and the other via junking of ships, automobiles and other durables.

    The second source depends on the consumption of cars, refrigerators and steel-related items. Generally, the availability of scrap in any year should be roughly equivalent to the average steel production of the previous 15 years. Except steel that goes into buildings, which are not available for scrap, every other steel that goes into industrial buildings, cars, refrigerators and the like is available as scrap after roughly 15 years. "The scrap availability in 2004 is actually the steel that got produced 15 years ago. That is roughly a thumb rule,'' says Mr. Muthuraman.

    Since steel consumption grew at only 1.8 per cent in the last 15 years or so, the steel that was used in the last 15 years will be insufficient to sustain the extent of steel making that is going to happen through the electric arc furnace route in the next 15 years. "That is simple arithmetic. Steel was not made sufficiently then. Now the rate of growth is going to be much faster. We are going to see a situation where there is going to be a shortage of scrap for the electric arc furnace route,'' explains Mr. Muthuraman

    There is another problem on hand. The poor demand in the past has not really seen any expansion in mining capacity. Now the steel demand is picking up. But there has not been any investment in the recent past in the mining field.

    This will have a different fall-out. There is likely to be a shortage of iron ore and coal for the next three to four years. The Tata Steel chief predicts that the prices of iron ore and coal will rule high in the next four to five years, triggering a responsive trend in the price of steel. At the same time, he feels that it will become much more costly to open new mines. This will have enormous cost implications.

    All these factors — the demand scenario, the raw material picture and the scrap situation — are going to drive steel prices up.

    "For the next 10 years, steel prices are going to be higher than the ones obtained in the last 10 years. If hot rolled coils were hovering around $250 a tonne in the past 10 years, they will probably be closer to $350 in the next 10 years. It is very difficult to predict, yet. But that is bound to happen,'' asserts Mr. Muthuraman.

    K. T. Jagannathan

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