Risk and Threat Analysis in the Steel Industry

We just had our Planning Conference and the theme is "We are in a crisis mode." Everybody is.

Scanning the current steel environment, with the effects of the global financial crisis looming in the domestic front, one may be able to see the major risks and threats which should be strategically addressed.

First is the prolonged global recession which is highly probable to happen. Another is the influx of cheap (and probably low quality) imports as neighboring countries will try to look for export market to unload their inventory surplus, which will surely result in the lowering of prices and making the market highly competitive. Such products have already in fact in the past and current year entered the Philippine market. This will force production to attain highest levels of efficiencies, especially on cost reduction.

On the financial front, bank credit facilities will be tightened putting pressure on working capital and may result in material procurement delays, longer collection periods, etc. Liquidity becomes extremely important and significant. Add to that the possible peso depreciation and we have indeed a scenario of business survival.

Obviously, those that may be able to properly control these risks and threats and convert them into opportunities will surely come out as the winners.

Steel Industry in Crisis

The steel industry is also hit by the crisis bug. After enjoying comfortable sales and margins for 3 quarters on an environment of escalating material prices, steel companies are now hit by high cost inventory due to the abrupt lowering of material prices this 4th quarter and low customer demand. Example is cold rolled coil ( CRC). The year started with CRC prices averaging at USD 700/MT. It continue to increase, peaking at almost USD 1300/MT during the 3rd quarter. Now it went down to as low as USD 600/MT. Scrap iron/steel was selling at P27/kilo but is now at just P5/kilo. Customers don't buy, waiting for prices to still go down. Many companies have stopped production. Massive cost reductions are undertaken, from energy and power to manpower costs.

We've got news from a friend in the Middle East who said that Emirates Steel is on total shutdown; so are Hadeed and Unicoil in Saudi Arabia. At Global Steel in Iligan, which during those glorious years was called National Steel Corporation ( my alma mater), all facilities are in shutdown. They have implemented a 5 day work week and soon, will resort to forced leaves or even lay-offs. Here in Manila, contractual workers will surely be the first to go.

The sad thing is nobody knows when the situation will improve.