Markets in Action: Steel Industry is Hurting

Leander McCormick-Goodhart writes about an industry under pressure

The steel industry is the new victim of the financial crisis. Arcelor (the world’s largest steel producer) is planning to cut its output for the fourth quarter by over 30%. The crippling of the steel industry is explained simply through the consideration of supply and demand in the complex interconnected markets.

Steel producers have suffered due to the stagnation of the construction industry and the drop-off in car sales worldwide. In the US, industry wide car demand has plummeted by 26% as compared to last year, and new vehicle sales in the UK are down 26% from a year ago.

This great reduction in demand for cars has hit the steel industry very hard. Arcelor disclosed a 29% increase in third quarter profits- a figure falling short of analyst’s expectations.

In addition, the recent bursting of the global commodity price bubble has lead to a significant fall in the price of steel. This means that there is much less incentive for steelmakers to supply steel.

Tata plans to cut steel production at Corus by around 1 million tonnes over the next quarter and Corus is planning to cut 400 jobs.

I believe that steel producers, as well as many other heavy industries, are in for tough times. I think they will have to reduce their expenditure- cutting spending on energy, transport and perhaps even jobs. However, will these reductions be sufficient to compensate for the decline in the market?

For some further reading:

European Steelmakers warn of tough times ahead

Hurting the real economy; Heavy industry