Battle of the Steel Industry

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One of the big economy stories of the past year has been the plummeting of commodity prices, which according to Bloomberg, have declined by 46% since 2011 causing bankruptcies and industry consolidation. In particular, the global steel industry has seen prices fall by 55% over the past 12 months to reach a current trading price of around $ 210/MT.

This slump was attributed to a large degree on the gap increase between production on one hand and consumption on the other, where the economic changes in China have played a major role: previously a manufacturing country with huge steel production, today China´s shift to a consumption based economy and its growth slowdown caused an important decrease for domestic demand altering the balance between production and demand which led to a depression in prices. China has been forced to sell abroad its excess production of steel estimated by Jefferies at around 230 million tons at a very low price given that uncertainties in the country continue to rise.  

From the other side, developed countries that are considered to be big consumers in commodities such as North America and Europe are still recuperating from the economic crisis and still in a deleveraging cycle. Their economic growth and demand for commodities remain weak, and consequently their lower demand for Chinese exports has furthermore slowed growth in China that appears to be more dependent on the West.

The problem of over-capacity does not look resolvable over the next few years, and thus in order to reduce capacity many will have to turn to consolidation and restructuring of companies, job losses and even companies closing. However, the emergence of a growing middle class and the demand for real estate and infrastructure may provide a temporary relief to this industry problem.

So the question remains, will the steel industry witness a new normal or slow growth?


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