Engineering & fabrication segment accounts for 24% of steel demand

Written by Sushim Banerjee | Updated: Sep 2 2014, 07:30am hrs
The engineering and fabrication sector is a critical component in growth and development of Indian steel industry. The output of this sector meets domestic demand emerging from capital and consumer goods, yellow goods, cold reducing and tubemaking, agricultural implements and other general engineering and fabrication segments. It also caters to engineering exports, comprising around 22% of Indian commodity exports in FY14.

A significant component of the manufacturing sector that is steel-intensive is directly linked with engineering and fabrication segments under the categories of fabricated metal, machinery and equipments, electrical machinery and apparatus and furniture manufacturing. A broad assessment of sectoral pattern of steel consumption in India indicates that around 24% of total steel demand is accounted for by the engineering and fabrication segment. Although motor vehicles, trailers and semi-trailers and other transport equipments are also part of manufacturing and are steel-intensive, their contribution to steel consumption is separately shown under automobile sector accounting for about 10% of total steel consumption.

It would be interesting to work out a composite index comprising separate indices of the above four categories of engineering and fabrication under the manufacturing sector and then calculate how this index has behaved with steel consumption in the country over the past decade to arrive at steel intensity between these two variables. The composite index thus formed indicates a growth of (-) 3.3%, (-) 1.3% and 8.7% in FY13, FY14 and in Q1 of FY15, respectively. At a factor of 0.7, the index signals a close correlation with steel consumption. However the movement of the index impacts steel demand through the manufacturing sector and based on the relationship of the manufacturing sector and steel consumption, the resultant impact comes to around a factor of 0.5.

During Q1 of FY15, the composite index has grown by 8.7% and hence the above relationship tells us that steel consumption should have moved up by 4.4%. But actual data show steel consumption in Q1 of FY15 has grown by only 0.6% over the same period last year. This implies that the biggest contributor to steel consumption, namely infrastructure and construction sector (accounting for 60% of consumption), has performed much below the anticipated level. The major driver of infrastructure and construction is investment made by the government supplemented by private corporate and household sectors.

It is distressing to note that gross fixed capital formation at current prices as a % of GDP at market prices has fallen from 28.7% in Q1 of last year. While GDP has moved up to 5.7% in the past quarter, a clear 1% jump over last year, the performance of the manufacturing sector, growing at 3.5% in the quarter (-1.2% last year) with the construction sector clocking 4.8% growth as opposed to only 1.1% last year, provides a good signal that the economy may at last be back on the rails.

The feel-good factor has been working silently in boosting up the PMI at 51.3 in April 2014 to 53 by July 2014. The increase in value added output from the manufacturing sector reflects the growing trust of the corporate sector in carrying on business activity. Growth in the construction sector, particularly in real estate, is also synonymous with 9.5% growth in cement production in the quarter, which exceeds the steel production rate by nearly 6 times.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal