Posted on 20 Oct 2015
India records steel demand growth in difficult external environment
Deceleration in China's economic growth as
President Xi Jinping shifts focus from investment to consumption-led
growth to avoid any hard landing for the world's second largest economy
has meant the cycle of capacity, production and demand for the world
steel industry has come to an end.
This was unavoidable since China, for nearly two decades, grew steel
capacity at such a frenetic pace that it has nearly half the share of
global production. The profile of the world steel industry has become
such that if China sneezes, producers in other regions will invariably
catch cold. A lethal combination of overcapacity and demand fall, both
mostly occurring in China, has been largely responsible for a 40 per
cent fall in steel prices this year. Margins remain under pressure
despite big falls in prices of iron ore and metallurgical coal, its two
most important ingredients. Investors have lost interest in shares of
producing companies.
ArcelorMittal is down half from its 52-week high of $13.315. Here, Tata
Steel shares have suffered value erosion of the same order. This is in
spite of 2.9 million tonnes (mt) new capacity at its Jamshedpur plant
being fully ramped up, continuous product mix enrichment and the steel
ministry's Joint Plant Committee reporting the country's demand in the
first half of 2015-16 growing 4.1 per cent to 39.14 mt on a year-on-year
basis.
Local companies have to do with low prices caused primarily by weakness
in the global market and our imports rising 41.4 per cent to 5.4 mt in
the first half of 2015-16, compared with the same period of 2014-15.
Whatever their pains, in the World Steel Association (WSA)'s 'short
range outlook for 2015 and 2016', India emerges as one of the few bright
spots, where "steel demand... is expected to maintain growth momentum
despite adverse external environment".
India, according to WSA, is one of the few countries to remain a
"resilient" economy in the face of a "global slowdown" because of its
commitment to "reforms". Indian steel demand in 2015 is to rise to 81.5
mt from 75.9 mt in 2014. WSA says its use will further improve by 7.6
per cent to 87.6 mt next year. Hopefully, the three-year high of 6.4 per
cent rise in industrial growth in August, supported by good showing in
manufacturing, mining and electricity, will be sustained to generate
good demand for steel in the months ahead.
There is a damper, however, in the form of India's exports shrinking for
10 straight months by September. Engineering goods shipments contracted
22.8 per cent reflecting the strained global demand. For the same
reason, Chinese exports fell 3.7 per cent in September compared with a
year earlier. A major point of concern for the industry here is that
large volumes of the new steel capacity are getting commissioned when
producers are not able to earn any surplus by selling items at current
prices. In India's previous round of major capacity expansion after the
government threw open the sector to the private sector, Ispat
Industries, since taken over by JSW Steel in a rescue operation, and
some others found themselves on the mat by a bad market. That is not a
forgotten experience. Bank loans to steel groups becoming non-performing
assets will be unavoidable if prices do not improve. For that, the
economy needs robust public spending, clearances of infrastructure and
other big projects, and moderation in steel imports.
A WSA official says the world steel industry's low growth will last till
"other regions of sufficient size and strength" deliver "another major
growth cycle". Such hopes largely rest on India. Hasn't Prime Minister
Narendra Modi given a call to grow India in the next two decades at a
pace that matches China's in its best days? As has been the Chinese
experience, steel demand growth here will remain strong in case the
economy advances by eight to nine per cent a year.
WSA says China's steel demand will be down 3.5 per cent to 685.9 mt this
year, on the back of demand contraction of 3.3 per cent to 710.8 mt in
2014. In 2016, too, the country will suffer a demand setback of two per
cent to 672.2 mt. Fall in local steel use will leave China with huge
exportable surplus. That's a point of concern for India.
