Sales are Down for Tata Steel so they Conserve Cash instead of Expanding Production

Posted by PITHOCRATES - February 12th, 2012

Week in Review

Here’s a lesson in Economics 101 offered by Tata Steel (see Unexpected loss for India’s Tata Steel posted 2/9/2012 on BBC News Business).

Tata Steel, the largest producer in India, unexpectedly reported a loss for the last three months of 2011, hit by weak demand…

Higher prices for raw materials as well as falling demand and prices in Europe contributed to the decline, Tata said…

The head of Tata’s European operations said he did not expect demand to pick up this year.

“We are accelerating cash conservation in expectation of muted but stable demand in our core markets in 2012,” he said in a statement…

“There hasn’t been a demand uptick that was expected, so prices have come down,” said Ravindra Deshpande from Elara Securities in Mumbai.

With less people buying steel the supply of steel exceeds its demand.  So the price of steel has fallen.  Common in a recession.  But what does Tata do?  Do they borrow more money to expand capacity?  No.  They conserve cash.  To ride out these tough times of low sales.

Making money cheaper to borrow won’t change this.  This is why lowering interest rates rarely works to stimulate an economy out of recession.  It is the painful process of falling prices and reducing capacity to meet actual demand that pulls an economy out of a recession.  Interfering with this process only pushes up prices and capacity further above real demand.  Making the correction more painful.  And prolongs the inevitable recession.  

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