1. Increasing steel uses will dispel veil of uncertainty in sector’s outlook

Increasing steel uses will dispel veil of uncertainty in sector’s outlook

The just released Short Range forecasts for the current and next year by World Steel Association has reconfirmed the uncertainty engulfing the geopolitical situations in various parts of the world and its adverse impact on steel demand.

By: | Updated: October 18, 2016 6:59 AM
steel mip, mip steel, steel mip price, Globally a number of studies have been conducted to ascertain the impact of uncertain atmosphere on various economic parameters in different countries. (PTI)

The just released Short Range forecasts for the current and next year by World Steel Association has reconfirmed the uncertainty engulfing the geopolitical situations in various parts of the world and its adverse impact on steel demand. The origin of uncertainty lies in weakness of investment in both developed and emerging economies and the Brexit imbroglio. The rising corporate debts and a regular fall in property prices in China that has been the centerpiece of global growth in steel, have further accentuated the uncertain scenario.

Globally a number of studies have been conducted to ascertain the impact of uncertain atmosphere on various economic parameters in different countries. A recent study by a group of Indian economists (EPW vol L1 no. 35) has shown, based on empirical factors reformulated under econometric modeling, that a 10% increase in Economic Policy Uncertainty (EPU) in India is associated with a 3% drop in investment rates at firm level and also in the economy. During times of Economic Policy Uncertainty, there is a tendency among various enterprises as well as by the government to postpone investment and stall existing projects. It is also seen that BSE index is negatively correlated with EPU (a 10% increase in EPU translates to 0.8% decline in BSE index).

The underlying message of WSA forecasts needs to be interpreted in an objective manner. As these forecasts, and for that matter, any commodity forecast is generally based on an assumed growth pattern of the end using segments; the sustainability of the assumed segmental growth pattern would continue to remain highly dependent on the element of uncertainty. It is also to be perceived that investment or Gross Fixed Capital Investment is the single most important factor determining the health of the economy.

The global steel consumption that went down by 3% in 2015 is slated to reach 1501.3 MT in the current year, at a nominal 0.2% growth over last year and reach 1509.6 MT in 2017, at 0.5% growth. This is in tune with the global GDP growth projected at 3.1% and 3.4% in 2016 and 2017 by IMF and global trade volume assessed to grow by 2.3% and 3.8% in 2016 and 2017 respectively. In all the forecasts the pulling down impact of heightened uncertainty is unmistakable. But it is also acknowledged that the uncertainties surrounding the currency movements (dollar and yen getting stronger and pound sterling weaker), geopolitical scenario, investment measures, premature deindustrialisation, ageing populations are contained to the regional level and therefore the specific remedial steps may have a better success rate.

Indian steel consumption that was 81.5 MT in Fy16 has been projected to grow at an average rate of 5.5% during 2016 and 2017 to reach 89.1 MT by 2017. India would still be 8.7 MT behind the level of consumption of USA by next year. Chinese steel consumption has been projected to drop by 20 MT between 2015 and 2017. India would lead the global steel consumption growth by adding 9 MT during these two years, the highest volume growth in the world during this period.

Thus the growth in construction and infrastructure sectors accounting for more than 60% of steel consumption in the country being crucially dependent on investment would lead the table of driving factors. Already roads, railways (including metros), industrial corridors projects proceed on schedule as most of these are funded by world Bank, ADB and Japanese Consortium. Significant policy changes have been made to make these projects acceptable under PPP mode. While appropriate trade measures by the government restricting cheap flow of imports and dumping of surplus steel to India have helped the domestic steel producers to gain additional market share, the growing requirements of value added steel, light gauge high performance steel, both in long (construction sector) and flat (manufacturing and processing sector including Automobiles) categories would prompt the indigenous players to upgrade plant facilities and to emphasise product development for rolling value added steel. The massive potential of increasing steel uses in the country would be a strong force to dispel the veil of uncertainty in business outlook in the country in the coming months.

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

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