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The hissing sound that is being heard in the steel world could be ArcelorMittals stock losing air. The share price of the worlds largest steel producer has gone down by more than 20 percent since the beginning of 2012, and around 80 percent since its peak in 2008.
Used in everything ranging from household electronics and automobiles to warships, the widely traded alloy is certainly up for some steely times. A lot of it has to do with demand.
The deteriorating economic situation during the second quarter of the year highlighted by the uncertainty caused by the European debt crisis and the snowballing slowdown in China; the biggest consumer and producer of steel, has wreaked havoc on the global demand and manufacturing activities.
World Steel Association (WSA) has cut its forecast for steel demand worldwide to 2.1 percent for 2012, which is a significant 830 basis points lower than the actual consumption in 2011.
For China which has witnessed consumption growing at a compound annual growth rate of 11 percent for the past five years, the estimates for steel use have been trimmed to 640m tones in 2012, an increase of just 2.5 per cent year-on-year.
The crisis of shrinking demand for one of the worlds highly traded commodities is more distinct in Europe where the signs of economic recovery are nowhere in sight. That is not all. There is a supply glut in the world steel sector roughly equivalent to one-fifth of Chinas annual consumption. With most of the excess capacities in Chinas steel sector, steel prices have been trotting down worldwide.
Another problem beside the skewed demand and supply is the shriveling margins. Profits of the largest steel maker ArcelorMittal have plunged by 37 percent YoY during the second quarter of 2012, while that of the Japanese giant Nippon Steel and South Korean titan Pasco shrunk by 13 percent and 66 percent respectively.
Will the falling iron ore prices offer a breather to the steel sector worldwide? May be a bit.