The common wisdom based on a decadal experience is that demand elasticity of steel in emerging economies will stay ahead of gross domestic product (GDP) growth rate. This was particularly evident in China during preparations for 2008 Beijing Olympics and construction of the Three Gorges Dam, when steel consumption grew close to an annual rate of 20 per cent compared with GDP growth rate of 12-13 per cent.
But, much water has flown down the Yangtze river since then and China’s 12th Plan (2011-15) provides for an annual GDP growth rate of seven per cent. Economist Intelligence Unit, however, estimates that China’s GDP will grow nine per cent this year and 8.6 per cent next year. The current plan period, according to China Iron & Steel Association (CISA), will see the country’s annual steel consumption growth slowing down to seven per cent and less as the steel industry undergoes a critical phase of “transformative development”, so that common wisdom does not hold good for China any longer!
The coming years will see China pursuing “sustainable growth” for steel instead of chasing quantity. Parallel to continuing the drive to phase out uneconomic capacity, China will be seeking capacity consolidation and scaling the steel value chain. Now there are signs of China progressively reducing emphasis on exports of steel based products in favour of domestic demand driven growth for steel. Whatever that may be, the World Steel Association (WSA) reports that in the first eight months of this year to August, China’s steel production grew at an impressive 10.6 per cent to 469 million tonnes (mt). During this period, India recorded a rather modest steel output growth of 5.3 per cent to 48 mt. CISA says China will end the year with production of up to 710 mt leaving at least 90 mt of unused capacity.
WSA short-range outlook says the Chinese steel demand growth will shrink to 7.5 per cent in 2011 from 8.5 per cent in 2010. But, there will be a bigger demand fall to six per cent next year. In any discussion on world steel, China with close to 45 per cent share of global production will remain at the centre point. WSA is anticipating a 6.5 per cent rise in global steel use this year to mark a major fall in demand growth of 15.1 per cent in 2010. What should not be missed here is that the world came out of the memory’s worst recession in 2010 and the growth rate in steel demand that year looks impressive since it happened on the back of deceleration in metal use in past two years. World steel use fell from 1.32 billion tonnes in 2007 to 1.299 billion tonnes in 2008 and then further to 1.203 billion tonnes in 2009.
What no doubt will be raising steel men’s hackles here is the rather grim WSA demand growth forecast for the current year. Just ahead of WSA saying that Indian steel demand will grow only 4.3 per cent this year, SAIL chairman Chandra Sekhar Verma on the assumption of GDP growth of 8 to 8.5 per cent said local steel demand should “rise at least 9 to 10 per cent.” Earlier steel secretary Pradeep Kumar Misra, undaunted by what is happening to the real economy said, steel demand “would go up to 10 to 12 per cent by year-end given the higher elasticity of steel demand vis-a-vis GDP growth.” The local steel industry didn’t get off to a good start in 2011-12 as the meagre 1.8 per cent demand growth for its products in the first half will prove. A number of factors have combined to keep the steel demand down to a point of concern. But it could not have been otherwise because of the prolonged monsoon slowing down construction activities, disappointing industrial growth and now power crisis short-circuiting factory work across the country.
But, both, Misra and Verma being incorrigible optimists, they appear confident that steel demand will be picking up strongly now onwards. If this becomes the case, then that conventional wisdom will still be holding good for India where new capacity addition of up to 12 mt will take the total to 90 mt by 2011-12-end. Verma draws comfort from recent rises in steel prices of the order of Rs 500 to Rs 1,000 a tonne. “Steel making raw materials, however, remain a point of concern. This is in spite of coking coal prices coming down from the alarmingly high of $350 a tonne, caused in the wake of floods related supply disruptions in Australia, to the recent October-December contracts at $250 to $270 a tonne. I think coal will be seeking further lower levels,” says Verma. Interestingly, in spite of export disruptions in Karnataka and Goa, world iron ore prices have remained under pressure. Financial uncertainty in the West, steel capacity outages in Europe in attempts at matching supply with weak demand and margin pressure on Chinese producers led to fall in spot ore prices from $190 a tonne at year start to about $150 a tonne now, their lowest since November 2010.
