The Chinese economic policy reforms, adopted in the 3rd Plennary Session of the Communist Party, are beginning to take shape.
Light industries are preferred over their heavier counterparts, the financial sector, which was hit by unpaid recoveries, is being disciplined with lots of reforms and steps to initiate global integration, while sustainable development and protecting the environment have been accepted as rules for all business operations.
The impact on the steel industry is immediate as the rate of growth of crude steel production in China in first two months of 2014 is down at 1.7%. The apparent crude steel use in January declined by 6.3% over previous year. Warehouse inventories are up in February.
Already the demand from the steel-intensive sectors such as infrastructure, machine building is slowing down compared to last year. China?s Purchasing Managers? Index (PMI) declined to 48.1 in March compared to 48.5 in February.
The major steel-producing regions in the country are closing capacities in 2014.
The policy of consolidation in steel industry has been put on hold. The Chinese endeavours to implement policy reforms have no doubt received praise from the IMF.
There are two reasons for the same. First, giving preference to light industries is construed as dominance of service sector away from manufacturing that can be interpreted as showing the features of a developed nation.
This would also pave the way for more private sector engagement, more intrusion by the multinationals in the Chinese economy and in a way resolve the excess capacity problems faced by various segments of the industry in the West. It would also result in keeping down Chinese exports of machinery and equipment in the global market and bring down indirect exports of steel by China. Financial sector reforms and global integration would demand capital account convertibility by making Renminbi a global currency.
In the aftermath of the financial downturn and recession of 2008, the global steel industry was driven by Chinese steel industry that has experienced one of the fastest growth trajectories. The moderation in GDP growth rates in China from more than 10% to the current level of 7.7% and further down in the coming quarters to 7.5% implies a slower growth of steel industry in the country as steel intensity of investment in service sector and light engineering is at least 5-6 times lower than that in infrastructure, construction and heavy machineries. The whole of Europe, US, Japan, South Korea and CIS had witnessed a negative growth in steel production and consumption during 2008-12.
When the reform policies take their roots firmly in China, we would also expect the same scenario, reduced growth in the initial years followed by stagnancy and ending with negative growth.
Undoubtedly, the Chinese slowdown would adversely impact global steel and mining industry.
The Indian steel industry is planning to substantially augment capacities in order to meet the growing demand from infrastructure, automobile, engineering and processing industries.
The introduction of economic reforms in Chinese economy would shorten the gap between the steel industries of India and China in the coming years, but this can hardly resolve the negative risks that would plague the global steel industry.
SUSHIM BANERJEE
The author is DG, Institute of Steel Growth and Development. The views expressed are personal