The financial-market events of the last couple of months have shaken many market commentators and economists to the core.

They have also raised a number of questions: Why has a crisis associated primarily with a housing bubble in the US morphed into a global financial meltdown and credit crunch? What does it mean for the South African economy? Is it positive that oil prices are falling, but dragging down the prices of commodities that we sell? What will the credit crunch mean for State-owned enterprises such as Transnet and Eskom, which together need to raise nearly R200-billion over the next few years? What is the correct monetary policy response to possible stagflation?

But there are two high-profile spillovers from the current crisis that have also pleased a number of practitioners in the South African economy. The one is the fall in fuel prices, while the other is the softening of steel prices – both are basic elements in any value-adding or infrastructural activity.

Since September, the steep steel price increases that characterised the first eight months of the year have not only halted, but have now started to retreat. In October, the country’s largest steel producer, ArcelorMittal South Africa, announced its first price reduction for the year, which was swiftly followed by a second, even larger, cut from November.

But Where Is It All Headed?

The overwhelming sentiment – in the steel market, specifically, and mirrored perfectly in the economy more generally – is one of genuine bewilderment. And the state of confusion in the steel market was epitomised in a recent commentary by ArcelorMittal Group CEO Lakshmi Mittal, who, as head of the world’s largest steel producer, should have more visibility than most about the future trajectory of the steel market.

It should not be forgotten that, in July, Mittal was extremely bullish about the prospects for steel. In fact, he even said the world might be facing its first steel shortage in decades because of accelerating demand and a lack of investment.

Speaking to Bloomberg News, Mittal said: “There is short supply; all steel companies are running at full capacity.” He also asserted that the “volatile years of boom and bust” in steel prices have been relegated to the past.

But such stridency had all but disappeared at last week’s gathering of the World Steel Association (previously the International Iron and Steel Institute) in Washington, DC.

Speaking after his appointment as chairperson of the rebranded organisation, Mittal was again quoted by Bloomberg News as saying that the international steel market faced an “unprecedented situation” as a result of the credit crisis.

“What we are seeing on a global basis is a situation which is very unclear,” he explained, adding that steel users were also adopting a “wait and see” approach, using up existing stocks before reordering.

In fact, this very lack of visibility even led to the association taking the unprecedented step of delaying its market forecast for 2009, which would now only be released in April.

Officials said that, owing to “rapidly changing circumstances”, it was impossible to make reliable predictions through 2009.

For his part, Mittal reasserted that the long-term fundamentals of steel demand had not changed and that he hoped that the financial crisis would be short lived. All the association was prepared to add, though, was that 2009 steel demand growth should be “above the world gross domestic product growth rate”.

But some even believe this statement to be overly optimistic, with Nippon Steel chairperson Akio Mimura having been quoted in a subsequent newspaper interview as saying that growth in global steel demand could slow to less than 5% in 2009.

“I would be happy to see even a slight increase in demand in 2009,” Mimura was quoted by the Nikkei business daily as saying. “Five per cent growth may be asking too much,” he added.

Is Anything Different?

But unlike the situation in previous years, when the industry was so fractured that there was little prospect of a supply-side adjustment to match falling demand, the steel industry is far more consolidated these days.

This could mean that consumers in South Africa and elsewhere might not get the substantial drop in prices that might have been the norm during previous downturns.

Indeed, the outgoing chairperson of the World Steel Association, Ku-Taek Lee, who is also chairperson and CEO of Posco, did his best to lay the ground for such supply-side discipline, warning the industry that over- capacity could return to harm it.

“We should prepare for the risk of a deep recession,” Lee asserted, going on to call for excess to be removed along with “distorting” government subsidies.
ArcelorMittal itself has already suggested that it could cut output by 15% globally if needed.

But probably most significant is the news out of China last week that four of its big steelmakers had agreed to cut production by up to 20%.

China Metallurgical Mines Association chairperson Zou Jian told Reuters that the steel companies decided to cut production until steel prices stablised.

All four producers – Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel – are State-owned and located in northern China. They have a total capacity of about 100-million tons, almost one-fifth of China’s estimated production this year, which is expected to reach 520-million to 550-million tons.

If such statements result in actual cuts in output, then, perhaps, Mittal’s assertion that the era of boom and bust is over might end up being visionary. But given that just about every economic commentator got it wrong with regard to the depth and duration of the financial crisis, perhaps, such optimism about the steel market is guided more by hope than information.