The global steel industry still remains in a mess after the world's biggest producer, ArcelorMittal reported another loss for the first quarter of 2016 citing lower steel prices and lack of demand for the continuation of the loss making trend. Although the losses are marginally smaller than last years first quarter numbers, the steadfast grip Chinese producers are having on the industry is becoming devastating to a point where producers such as ArcelorMittal and Tata Steel are actively lobbying governments for protection in an attempt to save the industry.
ArcelorMittal says that the recent spike in steel prices were welcomed but it remained uncertain whether the current price fluctuations were an indication of a stronger move for prices over the long term saying warily that it will continue to put measures in place to protect the company's financial position.
A striking feature that's often heard when discussing the future of iron ore and more so commodity prices is the
lacklustre demand stemming from China who helped spur on a doubling of demand for steel in a relatively short period of time, lending hope to many mining producers that a ramp up in production of iron ore could reap considerable rewards in the years to come.
That motion of thought came to an abrupt end when signs of an impending Chinese economic slowdown started being felt by world markets coupled with the typical reluctant tone from executives defending their stance and investment. At the time China had been steadily producing its own supply of steel that provided the dual benefit of supplying the construction sector with a key product in the process of satisfying explosive demand coming from an expansionary infrastructure program that took aim at urbanising China but at the same time providing millions of Chinese workers with a means to earn an income from an industry known for mass job creation.
However Chinese steel production is not known to be the most cost effective which is why politicians decided to heavily subsidise the industry by bargaining that it played a much greater role in making Chinese citizens believe that its government was delivering on its promises rather than seeing it be driven by the profit motive.
The perfect brew of dilemma was stirring up and when the economic storm finally pulled into the Chinese economy, producers found themselves in a pickle of not being able to find buyers for an overinflated steel market even though they witnessed a considerable drop in prices prompting many to look towards the biggest consumer and contributor to the market, China, for answers.
It appeared that Chinese producers themselves could no longer rely on their own local demand to sell their produce and began selling into the global market causing a flood of supply and thus squeezing the margins of other producers to a bare minimum. The severity of the drop in the equity valuation of these steel producing companies indicated that the bubble had indeed popped and the need to re-assess was the next stage expected to take place.
We've seen a string of proposals by major steel producers in dealing with the problematic situation of haemorrhaging vital cash flow needed to keep these companies afloat however here's the next problem; if governments continue to prop up these loss making entities in an effort to save jobs, especially at a time when the global economic climate isn't on its best footing, the glut we continue to see will remain in place until the dynamics of supply and demand can resolve themselves without the intervention of other forces.
Added to this is the observation that producers are seeking protection rather than speaking of the benefits of government expansionary programs. This is because they've realised long time ago that the government's themselves are in their own dilemma and pushed into a tight corner where the space to maneuver is becoming smaller as the piles of debt left after a slew of stimulus measures aimed at reviving the world economy has failed to produce the optimal outcome.
One really needs to question the confidence of world leaders expectations when making an opinion on their comments about world growth in the future. If producers of a primary commodity used to signal the beginning of an upswing in economic growth aren't singing the same tune as those standing on the podium of promises, its time to step back and rethink the nature of the beast.
