What is the new normal for the Indian steel industry? As is the experience of China and India, the demand for metals, particularly steel, finding large application in construction, automobile and machinery building, gets guidance from the progress of gross domestic product (GDP). The fateful 2008-09 recession that originated in the West didn’t finally spare the two Asian countries. This put paid to the notion that our economy was ring-fenced from developments outside. Our steel consumption growing 11.6 per cent and production by10.9 per cent in 2006-07 was something that could happen when GDP grew 9.4 per cent on a high base of nine per cent in 2005-06.
Now, the International Monetary Fund (IMF) has forecast 4.9 per cent growth for India in the current year, down from the July projection of 6.1 per cent. This, however, is contested by Planning Commission deputy chairman Montek Singh Ahluwalia, who finds a “bit of a statistical problem” in the IMF calculation based as it is on market prices instead of factor cost. In any case, Ahluwalia says in the first half our economy grew by an estimated 5.5 per cent. He will not have anything to do with the IMF projection, since that will amount to accepting the possibility of economic “deceleration”. At what rate the GDP finally grows will have a major bearing on the demand outlook for steel. Steel fortunes in a given period will depend on the relative growth in production and demand for the metal. What is also to be seen is whether the supply of steel by our producers will continue to fall short of domestic demand.
JSW joint managing director Seshagiri Rao has put the subject in the right perspective by saying growth in steel consumption in the country stays ahead of production rise, the difference perforce made good by imports. Much new capacity is in the pipeline and this is coming on stream, albeit slowly. Rao says whatever new steel making capacity was commissioned over the past year, production in the first half grew only 3.4 per cent year-on-year (YoY) against demand growth of 5.4 per cent, equalling two million tonnes (mt). Half of this incremental demand was met by new extra production and the balance by way of imports. No surprise then, steel imports grew 33.6 per cent YoY, raising a few eyebrows. In this context of supply deficit, Rao says the country will need more and more steel capacity to take care of rising domestic demand. Capacity creation will get a thrust only when some of the major steel projects proposed by domestic and foreign groups take off after overcoming hurdles in land acquisition and getting forest and environment clearances. It is unfortunate that patience of the world’s largest steel group is wearing thin by highly time-consuming clearances embedded in our system.
Leading consultancy Platt, which spoke to some Indian steel officials in the wake of World Steel Association (WSA) publishing its short range outlook for 2012 and 2013 surprisingly found them not dispirited at all because of projection of slowdown in domestic demand growth. According to WSA, Indian steel demand growth is to fall to 5.5 per cent in 2012 from 7.5 per cent last year and further to five per cent in 2013. So, India will be using 73.6 mt of steel this year and 77.3 mt next year. Not only are steel officials hopeful of their industry reporting better performance in the second half, riding on the back of spurt in construction activity, a normal phenomenon, but also of demand running ahead of domestic supply in the long term. Steel Authority of India chairman Chandra Sekhar Verma says he hasn’t seen “any demand slowdown, which could be in the mindset of some. India is ultimately a demand centre. Slowdown will be in countries which are already saturated.”
How right is Verma. WSA has forecast that steel demand in developed economies will have a negative growth of 0.3 per cent to 394.6 mt this year and then next year demand will grow only 1.9 per cent to 402.1 mt. Even China, which over more than a decade, again and again surprised the world by its phenomenal steel production and demand growth, is now to experience a much-muted demand rise of 2.5 per cent to 639.5 mt in 2012 and then at a slightly higher rate of 3.1 per cent to 659.2 mt. Slippages in Chinese demand growth cannot but pull down the world steel consumption growth from 6.2 per cent last year to 2.1 per cent in the current year to 1.409 billion tonnes (bt). World Steel Economics Committee chairman Hans Jurgen Kerkhoff is, however, hopeful that the situation will “gradually improve in 2013 on the basis that the Euro zone crisis can be contained, the US successfully deals with fiscal tightening due in 2013 and economic stimuli measures secure a soft landing in China.” The hope here is, however, laced with quite a few ifs. Kerkhoff admits how the signs of recovery earlier this year were dashed due to “continued uncertainty arising from debt crisis in the Euro zone and a sharper-than-expected slowdown in China.” So, it will be wise to keep our fingers crossed over any predictions for 2013.
