Steel industry may find it hard to pass cost increase on to consumers
Profits of steel companies likely to remain depressed due to higher input cost, economic slowdown, rate hike
PHOTO: FILE
KARACHI:
While the scars of 2015 Samarco mining incident were not completely healed, another disaster at the Brazilian mining site, operated by mining giant Vale, badly bruised the mining world again.
The tragic collapse of the upstream trailing dam at the mining site, located in the southeastern Brazilian state, instantly killed 169 people while 141 are still missing.
Macquarie Bank said it had cut 18 million tons from its forecast of Vale’s annual iron ore output this year. As the incident has put a lot of emphasis on the safety of other mining sites, Vale has announced the decommissioning of 10 more dams, which may further reduce the output by another 40 million tons per year.
The global commodity market has been thrown upside down by the tragedy, after Vale was forced to halt operations and the Brazilian government said it was banning certain types of dams used to hold mining waste.
Many commodity analysts were hoping that rival producers such as BHP Billiton or Rio Tinto will step up production to respond to the crisis, however, they have very little room left to fill in the supply-demand gap as informed by BHP Billiton CEO Andrew Mackenzie.
Resultantly, the price of iron ore, which was hovering around $73 per ton before the incident, skyrocketed to $92 per ton - almost 26% rise - in just a few weeks, which is the highest level seen for the last many years. The effect of the rise in iron ore prices are visible with a slight lag in the local steel manufacturing industry, such as International Industries Limited, as listed companies in the steel sector underperformed the broader KSE-100 index, despite positivity in overall market sentiments.
The aftershocks of the Brazilian accident will last a little longer due to many court proceedings, lawsuits and further tightening of regulations that will negatively impact overall sentiments in the mining industry. In Brazil, Vale could face damages of as high as $7 billion from last month’s disaster, according to Bloomberg Intelligence, in addition to the $1.3 billion the company says it will have to spend to decommission 19 other upstream dams in the country.
In Pakistan, a slowdown in the construction industry is already visible in the recently announced financial results of the listed cement companies. The effect of reduction in local consumption, coupled with the fallout of Brazilian incident, may hit harder the local steel industry, which is already suffering from a slowdown in the economy.
It will be very difficult for steel industries to pass on the sudden rise in input cost to consumers without negatively affecting the revenue. Currently, many companies such as Aisha Steel, Agha Steel and International Steels are going through the expansion cycle due to the expected rise in demand from the China-Pakistan Economic Corridor (CPEC), construction of dams and recovery in local construction industry once the Naya Pakistan Housing Scheme enters the execution phase.
Considering the fact that only 50% of the steel product requirements are met locally, the expansion is not going to create a surplus and the steel industry should do well in the long run.
However, on the short-term basis, the bottom line for the steel manufacturing companies may remain depressed due to a sudden rise in the input cost, slowdown in the economy and further rise in interest rate to meet the precondition to sign up for the International Monetary Fund (IMF) package.
The writer is a financial market enthusiast and attached to Pakistan stock, commodity and debt markets
Published in The Express Tribune, March 4th, 2019.
While the scars of 2015 Samarco mining incident were not completely healed, another disaster at the Brazilian mining site, operated by mining giant Vale, badly bruised the mining world again.
The tragic collapse of the upstream trailing dam at the mining site, located in the southeastern Brazilian state, instantly killed 169 people while 141 are still missing.
Macquarie Bank said it had cut 18 million tons from its forecast of Vale’s annual iron ore output this year. As the incident has put a lot of emphasis on the safety of other mining sites, Vale has announced the decommissioning of 10 more dams, which may further reduce the output by another 40 million tons per year.
The global commodity market has been thrown upside down by the tragedy, after Vale was forced to halt operations and the Brazilian government said it was banning certain types of dams used to hold mining waste.
Many commodity analysts were hoping that rival producers such as BHP Billiton or Rio Tinto will step up production to respond to the crisis, however, they have very little room left to fill in the supply-demand gap as informed by BHP Billiton CEO Andrew Mackenzie.
Resultantly, the price of iron ore, which was hovering around $73 per ton before the incident, skyrocketed to $92 per ton - almost 26% rise - in just a few weeks, which is the highest level seen for the last many years. The effect of the rise in iron ore prices are visible with a slight lag in the local steel manufacturing industry, such as International Industries Limited, as listed companies in the steel sector underperformed the broader KSE-100 index, despite positivity in overall market sentiments.
The aftershocks of the Brazilian accident will last a little longer due to many court proceedings, lawsuits and further tightening of regulations that will negatively impact overall sentiments in the mining industry. In Brazil, Vale could face damages of as high as $7 billion from last month’s disaster, according to Bloomberg Intelligence, in addition to the $1.3 billion the company says it will have to spend to decommission 19 other upstream dams in the country.
In Pakistan, a slowdown in the construction industry is already visible in the recently announced financial results of the listed cement companies. The effect of reduction in local consumption, coupled with the fallout of Brazilian incident, may hit harder the local steel industry, which is already suffering from a slowdown in the economy.
It will be very difficult for steel industries to pass on the sudden rise in input cost to consumers without negatively affecting the revenue. Currently, many companies such as Aisha Steel, Agha Steel and International Steels are going through the expansion cycle due to the expected rise in demand from the China-Pakistan Economic Corridor (CPEC), construction of dams and recovery in local construction industry once the Naya Pakistan Housing Scheme enters the execution phase.
Considering the fact that only 50% of the steel product requirements are met locally, the expansion is not going to create a surplus and the steel industry should do well in the long run.
However, on the short-term basis, the bottom line for the steel manufacturing companies may remain depressed due to a sudden rise in the input cost, slowdown in the economy and further rise in interest rate to meet the precondition to sign up for the International Monetary Fund (IMF) package.
The writer is a financial market enthusiast and attached to Pakistan stock, commodity and debt markets
Published in The Express Tribune, March 4th, 2019.