1. Need to speed up capital formation for boosting steel consumption

Need to speed up capital formation for boosting steel consumption

It is now broadly accepted that the steel industry in the country is having a positive roadmap laid out for it in the coming months.

By: | Published: May 30, 2017 5:30 AM
steel consumption, steel consumption in India, EBITDA, iron ore, Global prices of iron ore, coking coal prices, Xiongan, One Belt One Road, GFCF The just published fourth quarter results of the steel majors show a promising upward trend in the sales volume including exports, restrained costs of operation and growing EBITDA.

It is now broadly accepted that the steel industry in the country is having a positive roadmap laid out for it in the coming months. The just published fourth quarter results of the steel majors show a promising upward trend in the sales volume including exports, restrained costs of operation and growing EBITDA. Global prices of iron ore at $56/tonne CFR China, coking coal prices at $153/tonne FOB Australia and scrap prices (HMS:80:20) at $260/tonne CFR East Asia point out to a further downward journey of these critical inputs for steel and would be a big relief to the bulk purchasers in restraining the operational costs of operation which is further benefited by the falling prices of fuel oil. To lend support to our rigorous export efforts, it is seen that industrial outlooks for EU and the US are robust and their demand for raw materials as well as cheaper finished products compared to that of their high cost producers is likely to rise. This apparently placid scenario may, however, change its course depending on what happens in China.

China has, as a part of its stimulus measures, announced a new Megacity of 12 million people at Xiongan (between Beijing and Tianjin port) which would require 15 MT of steel per annum for the next decade. There is a broad unanimity on the proposed One Belt One Road (OBOR) project cutting across the countries. In the midst of all doomsday projected for Chinese steel industry in terms of capacity elimination, economic restructuring from investment-led to consumption-led, unmanageable debts and bad bank loans, the country has clocked a GDP growth of 6.9% in first quarter of the current year.

The gross fixed capital formation (GFCF) as a percentage of GDP stands at 43.2% in 2016. It is down by 1.7% compared to its level in 2015. It is projected to fall by another 1.3% in the current year as debt levels required to maintain rise in GFCF pose risks to its financial system and may become unsustainable. The total debt of the central and provincial government along with the householders stands at 256% of GDP by end of 2017. Accordingly the share of GFCF in GDP has been predicted to fall to 36.9% in 2020 and by another 5% in 2025. Correspondingly, the share of household consumption in GDP is likely to grow from 40.4% of GDP in 2016 by another 7.1% in next 3 years and by 4.9% in the next 5 years.

It is reported by WSD that while steel consumption per trillion dollars of fixed asset investment in China is 133 MT, in the US it is only 16 MT. Thus, steel intensive investment is the real answer to the phenomenal growth of steel industry in China.

However, the linkage of steel consumption with GDP is gradually waning. For instance, during 2002 to 2011, the FAI in China has been rising by 24.2%, while GDP (at current prices) grew by 16.7%. It was 20.3% growth in FAI in 2012 with GDP rising by 10.6%. In 2016, a 8.1% rise in FAI was accompanied by 6.7% in GDP.

The apparent steel consumption in China is projected to reach 738 MT in 2017 as against 707 MT in 2016 and then sliding down to 650 MT in 2020 and to 600 MT in 2025. While China has announced to close down inefficient and polluting industries (notably the induction furnace sector with around 80-100 MT of capacity) by 50% in 2017, the fresh construction and infrastructure projects would make supply demand matching exercise a reality with sustainable domestic prices.

It would also encourage Chinese exporters not to bring down the export offers and realise a near stability in the global market. The political stability, an important element in influencing the global market, is, however, uncertain and may be a strong dampener to the above scenario.

In India, steel intensity in real GDP (steel consumption per million rupees) was 7.97 tonnes in 2012 as against 25.9 tonnes in China and in 2016 the indicator was 6.87 tonnes in India as compared to 33.3 tonnes in China. GFCF in India must show a quantum jump from the current level of 29.2% of GDP in order to fulfil the targets set in NSP 2017.

(Views expressed are personal)

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