BREXIT is the new buzzword generating maximum heat in the media and threatening the stability in an otherwise low-growth syndrome settling in Europe. No worthwhile estimates are available on the possible impact, positive or negative, on either side apart from a few conjectures and emotional outbursts. It is also possible to take a review of the referendum outcome through another set of voting. Under the circumstances, it is interesting to take a brief impact analysis of the already-beleaguered steel industry in the UK and the possible outcome on India.
Currently, the UK economy is growing at 1.8-2%. Its industry grows at 1.6% (latest month April 2016) and facing a CAD of $147 billion which is (-)4.8% of GDP, with an unemployment rate of 5.0% and inflation rate of 0.3%. The Euro crisis has severely impacted the UK economy and the pound sterling has already lost its dominant role in global trade. The UK produced 11 million tonne (mt) of crude steel in 2015 with consumption pegged at 10.5 mt of finished steel. The UK imported 7.2 mt and exported 7.3 mt in 2015 and was a marginal net exporter.
Significantly, imports occupied 68% share in total consumption which, by any standard, is quite high. Imports and exports are dominated by flat and semis. With the exit from the EU, it is not possible for the UK to get duty-free imports from a member of the EU and may have to locate alternate cost effective suppliers, unless China fills the gap.
The exit would necessarily lead to a loss of exports by the UK to EU members, who would apply MFN rates as import duties on supplies from UK.
It is to be noted that the UK, primarily import-dependent, has not been resorting to trade-restrictive measures even against China. Domestic consumers in the UK have been using imported steel from China, Germany, Italy, either cheap or duty-free. Steel consumption in the UK has been projected to grow 1.5% at 10.6 mt in 2016 and by 3.2% to 11 mt in 2017. The primary growth drivers in UK steel industry are the construction, mechanical machinery and automobile sectors, which have been projected to grow at 2.3%, (-) 1.3% and 7.8%, respectively, in the current year.
The subdued demand growth, particularly in construction and machine building, has already forced Tata Steel to hive off their long product mill operations in the UK. Here, one may like to subscribe to the view that the new government in the UK would go in for some stimulus measure to revive the economy in terms of public investment in infrastructure and other supportive policies to rejuvenate the manufacturing sector, in order to realise the employment potential associated with industrial growth. These factors would have a favourable impact on the steel industry and hopefully, the UK would appreciate the advantages of local content rule in government procurement for the domestic industry, so as to provide more orders for the domestic producers.
The UK’s economic revival under the new regime through the investment route would, however, would be dependent on its political capability to convince other economies in the world, including a few major ones in the EU, for investment flow. Initially, it is likely that flow of investment to the UK from other members of the EU would take time to fructify, as it would be within the framework of new rules agreed to by both the parties before the voting.
India imported 42,025 tonne of steel from the UK that comprises semis, bars/rods, electrical sheets and tin plates valued at R270 crore in 2015-16. India’s exports to the UK at 39,340 tonne are limited to long products, coated products, pipes and alloy/stainless steel. These products would continue to provide export opportunities for Indian steel producers in UK.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.