The decrease in prices in the steel industry became everyday reality. Demand was quite stabilized in 2014, but is not nearly enough to cover the world's major production facilities. Big problems and pressures currently affecting the steel industry are the consequences of too big world production of steel and low margins.
Peter F. Marcus - one of the world biggest experts in the field of steel industry comments this situation in interview published in The Economic Times:
According to his opinion, by devaluation of the Russian ruble, the cost of steel production in Russia fell from $ 425 to $ 300 per ton. Based on this costs, Russian manufacturers corrected their selling prices from the $ 530 down to $ 370 per ton. Chinese products, which always had the most affordable priced, quickly adapted to the new situation, and their price dropped to a record low $ 320 per ton. Regarding the real production costs, $ 370 is actually a limit price for a minimum of positive result. This situation has caused serious concern, almost panic among other world steel producers.
In response, all the world's leading companies corrected the prices of their products. Nippon Steel, JFE, Posco - which produce some of the highest quality steel in the world, sell their products with a minimum margin of $ 380 per ton.
The price trends will continue to be negative. Hot-rolled steel, which was recently sold at a price of 785 US dollars per ton, is being sold at only $ 333 per ton in China nowadays! In India, the same product can be purchased for $ 480, while in the US it costs $ 520. The indicators show that the prices of materials and steel products will continue to decline next year, while certain stabilization can not be expected until 2017.
The steel industry is very focused branch of production, with very limited access to capital, which will lead to the extinction of 10-15% of the world production capacity within the next two years. In the coming period, no major breakthroughs in steel demand are expected. On the contrary, the world's largest consumer and producer of steel - China, will face even lower domestic demand.
The biggest problems in steel industry:
Surplus of production will therefore still remain the biggest threat to the steel industry. Manufacturing plants are becoming older, and the costs of maintenance and repairs will become higher. Some companies already can't afford the regular maintenance due to too low prices of their products in the market. Productivity will also decrease because companies will not be able to work with optimum capacity. It will take serious restructuring to have this sector recovered. High indebtedness and seriously reduced profitability, drastically narrows the choices. The only solution that will permanently solve the problem is to suppress the surplus production capacity. According to some estimates, about 300 million production capacity should be closed by the year 2020, the part of which would be replaced by a new, more modern factories, with lower production costs. This is an extremely complex issue that will probably have to be dealt with by both the government and the companies.
What would steel manufacturers have to do to solve this problems?
reduce the world's total production capacity (only permanent solution that will enable the sustainable level of profit, and the optimum utilization of production capacity)
shut down unprofitable or low profit facilities
turn to the production of high-quality products, which can bring higher value of capital
reduce the number of resellers or have direct business dealings with end users