Posted by Gilmour Poincaree on October 30, 2008

30 Oct, 2008, 0533 hrs IST,MV Ramsurya, ET Bureau

MUMBAI: The slowdown in global economy due to the liquidity crisis has affected among all sectors, the metals industry such as steel plants-an integral part of the metals sector-are currently mulling production cutbacks and price cuts, a reminder of the situation way back in 2000 when the industry faced its worst crisis ever. The impact isn’t limited to steel alone; the non-ferrous industry including aluminium and copper has also seen a sharp reduction in prices although this industry hasn’t so far indicated any move toward a cut in production.

While it is reliably learnt that primary steel producers such as JSW Steel, Essar Steel and Ispat Industries have been exploring product rationalisation options, they haven’t commented on the issue officially so far. The companies however have gone ahead with production cuts in their overseas units as the situation is more grim in the US and Europe where the liquidity crisis has squeezed out demand. Locally the companies are learnt to be actively exploring options to cut production by about 10% to 20%.

Although the slowdown has affected most companies, those making commercial grade were more affected compared to those that have a ‘versatile’ product basket. This is because prices of the base-grade steel like hot rolled coils, has come down sharply by almost $350 per tonne in the past 45 days. The volatility is less in higher value products made by larger companies such as Tata Steel.

The fall in prices has been attributed to both the credit squeeze and a fall in Chinese demand. “In China, production has fallen drastically because of slowing demand,” said JSW Steel finance director M V S Seshagiri Rao. For example, China used to make 45 million tonnes of steel every month till July, which is equal to about 10 months of total production in India.

“That has come down to 41 million tonnes in China and is likely to fall further,” added Mr Rao. Tight cost-control measures has tightened corporate spending on fixed assets and metal consumption in China, say international reports. According to Indian steel industry executives, some Chinese steel mills are cutting output. It is estimated that 1.25 million to 1.3 million tonnes of hot rolled coil production will be lost because of current out-ages at large steel mills. Some companies have stopped production of low-value-added products such as slab, rebar and wire.

The state-run NMDC, which supplies most of the iron ore requirements to Indian steel companies, is likely to meet Japanese steel buyers. “We will take a decision on fixing ore prices anytime, it could be after the meet in Japan or before that also,” said chairman Rana Som. The state-run ore supplier is likely to revise price upward as “long-term contract prices are lower than spot prices,” said Mr Som.

In the non-ferrous sector also, the situation is not very different. The Anil Agarwal-controlled Vedanta Resources on Tuesday said that its copper cathode production at Tuticorin has fallen by 13.4% to 149,000 tonnes. Although this is due to a planned 26-day maintenance shutdown in the first quarter and stabilisation issues in the second quarter, the slowdown in demand could have some impact in the near term. “There is a slowdown for sure,” says Vedanta finance director Tarun Jain. “All asset classes, including metals, have gone in for a de-rating and the liquidity crisis is affecting everybody.”

In aluminium, last week there was a steep price fall leading to most aluminum smelters in the world operating at a loss. A recent Macquarie Research report says that most base metals prices fell sharply last week – nickel was down 28.7%, copper fell by 28.5%, zinc was down 18.6% and aluminum by 11.5% as “the market is factoring in a sharp downturn in global demand for the next 12-18 months. “The recent fall in Index of Industrial Production numbers shows an output contraction. Mr Rao said that the government should take measures to address the issue.

“It is majorly caused by the liquidity issue…so this needs to be sorted out first. Industry should be given assistance on working capital and on letters of credit. Trade is dying out and that is dangerous for the industry,” he added.



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