Steel production is generally driven by market demand shown by end products? behavior. The pattern of end products? need for steel is very much linked to the market sentiment shaped by the current investment climate, purchasing pattern of household, government policy, global environment and a host of other measurable and immeasurable factors.
Thus Purchasing Managers? Index tries to capture the market sentiment for manufacturing and services and is presumed that the index, based on averaging the responses out of a selected sample on a variety of queries relating to order booking, inventories, working capital, wage costs, imports/exports, projections for next quarter, would reasonably reflect the current market assessment. The stage is already set by the available indicators on industrial growth, specifically manufacturing growth and growth in capital goods, consumer durables, mining and electricity as well as the quarterly movement of GDP.
It is therefore generally concluded that production would decline if PMI shows a falling trend for 2/3 months consecutively. This is not happening for China where PMI in July at 47.7 is lower than 48.2 in the previous month and even lower than in May 2013. But steel production in China is growing at a rate of 7.4% during Jan-June period. Steel consumption is also moving up in China. Under these circumstances, is there a disconnect between steel growth and PMI movement, better defined as market sentiment in China? Chinese economy in Q2 of the current year has grown 0.2% less than the projected level. Industrial production at 8.9% in June is also lower than 12-13% clocked a few months earlier. The Current Account Surplus at $ 217.2 billion in Jan-March quarter is lower compared to 4 months earlier. However, steel exports from China in H1 of 2013 at 30.5 million tonnes exceeds last year?s level. It appears that the shift from investment to consumption-based growth in Chinese economy is taking time in changing the pattern of production and consumption of industrial products as demand for steel has kept on rising on the back of investment made in spreading the railway network in central and western regions. The rise in real estate prices is an indication of return of consumer demand with more demand for steel.
India, however, is witnessing the slowdown in production and consumption in consonance with drop in PMI. Steel production has fallen to 2.5% in H1 of 2013 and consumption growth slowed down to 0.2% in Q1 of FY14. From the Chinese experience, it is definite that the efforts of the government in clearing a few stalled mega projects, if materialized, can reverse the steel trend. Once this is achieved even at a slow and gradually rising rate, the PMI has to immediately improve as market information is patently transparent in our country and the trend in steel industry influences the health of a host of other backward and forward-linked industries.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal