The year 2015 may be specially remembered as a year of slowdown for the global economy, which grew by only 3.1% according to the latest IMF estimates. We have also witnessed a steep decline in prices of oil, metals and other commodities including foodgrains and services. Hardly any sector could cash in on the declining prices of raw materials, as inventories of finished products went up due to a fall in demand. Surplus capacities put an additional downward pressure on market prices. The only silver lining in such a depressing scenario, dubbed by a few as gradually approaching stagflation, was the growth projections in some of the emerging economies led by India. FY16 may clock a GDP growth of 7.3% or more for the country , now that growth in the previous year (FY15) has been revised downwards.
The Chinese economy that almost singlehandedly contributed to global growth in the past three years has started slowing down due to subdued domestic demand, as a fallout of a deliberate shift to consumption, away from investment. The thrust on light engineering, value-added metal, high-tech industries and IT-based service sectors and moving away from heavy engineering and gigantic structures are diminishing Chinese demand for most of the raw materials and creating stiff competition for many finished commodities, as exports from China at most competitive prices would seem to be the viable outlet for surplus capacities in these items.
It is interesting to see how the Chinese steel industry is planning to cope with the crisis of poor demand, massive surplus capacity, declining prices and negative profitability.
This is important, as Chinese strategy would have a huge impact on the global steel industry, the raw material scenario and trade. From the reports of Posco Research Institute and World Steel Association, it is seen that China has already eliminated more than 90-MT capacity in steel in 2010-14 and is planning to cut down an additional 100-150-MT capacities in the next five-seven years. The axe would mostly be on small and medium enterprises, thriving on credits from provincial banks and other units violating pollution norms. The surplus employees would be redeployed in other emerging sectors with requisite skill-based training. The mergers and acquisitions process in the steel industry would be strengthened. China ended last year with 110 MT of exports and the maximum thrust on exports would continue for the next two-three years. The abolition of export rebate on boron-coated steel has been strategically combated by having export rebates on chromium-added steel. As China is seized with a spate of anti dumping and countervailing duty impositions from the US, Mexico, Canada, the EU, Turkey, Indonesia, Vietnam and other countries, it is likely to focus on export destinations in South Africa, West Asia, South America and the ASEAN markets. The predominance of the BF-BOF process in steel making over the last few decades would lead to high domestic availability of obsolete steel scrap, and with the cutting down of production, the same would result in expanding the EAF route for catering to special steel and value-added steel demand. The prices of iron ore and coking coal are projected to hover below $50/t for China and around $80/t for Australia, respectively. The startling fact is that GDP elasticity of steel in China has progressively come down from 3.57 in 2000 to 0.35 in 2014, and with the diminishing share of FAI in GDP, the elasticity is likely to go down further.
Crude steel production in China has been projected by POSCO to drop from 803 MT in 2015 to 780 MT by 2020 and 750 MT by 2025. The estimates by WSD has put it at 775 MT in 2016 and 735 MT by 2020. The finished steel consumption in China at 675 MT in 2015 is slated to come down to 643 MT in 2020 and to 624 MT in 2025. For India, finished steel consumption which has been estimated at 81 MT in 2015 is envisaged to grow to 114 MT in 2020 and to 155 MT in 2025, at an average compound growth of 6.7% during the period, which is the highest among major steel-producing countries.
The projected consumption would ride the growth in the construction sector at an average rate of 7.6% and automobile at 7.5%. The future of Indian steel is therefore crucially dependent on investment in infrastructure building and in manufacturing sector. The budgetary announcements by February-end are eagerly awaited to facilitate such an enabling environment.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.