In a seminar held a few months back, a question was put up to the audience on what would be the impact on global steel industry due to a drop in Chinese demand. The response was divided. Currently, as the grim prospects on the business environment in China are emerging with the latest HSBC PMI at 48.3% in June and the weak indicator of order booked, the risk of Chinese slowdown and its adverse impact on global economic management is unfortunately getting a clearer shape.
The Central Bank of China, like the RBI, has not yielded to the pressure to cut down the repo rate further and ease the liquidity as demanded by the manufacturing sector that includes steel, coal, power, iron ore and other industries. Increased liquidity has a positive impact on growth, but it also contributes to inflationary trend and RBI has not brought down interest rate to rein in the prices. China has also pursued the same policy, but with the objective of restricting the banks to clamp on credits to small and medium enterprises engaged in businesses that lead to environment-related problems and may not even be credit worthy.
World Bank in its latest forecast downgraded GDP growth in both China and India to 7.7% and 5.7%, respectively from the earlier 8.2% and 6% and also for the world as a whole to 2.2%. Lesser steel demand from China brought down global prices of iron ore to the current level of $ 115 CFR/t in China. Chinese current account balance of trade at $224.8 billion by Q1 is much lower against the level at the beginning of the year.
Latest data on industrial growth in India at 2.3% with manufacturing and electricity growing at 2.8% and 4.2% rates in the first month of the current fiscal are lower than the level achieved in same period of last year.
There are, however, some positives that may bring back a better tomorrow from Q3. India?s credit rating has been upgraded from negative to stable and this would enhance capital flows both in terms of FDI and FII.
The government has reiterated its intention to start the stalled mega projects, especially in the power sector. To this extent, the government consent of increasing the power rate due to higher import cost of coking coal is welcome as it would pave the way for investment in the power sector. However, the power regulator has to monitor the prices of power in the coming months as it should not contribute to inflation.
Once the monsoon is over, the long product prices are set to move up. While rupee depreciation is to help enhance steel exports with exports in the first two months at 0.8 million tonne, exhibiting 23% growth over last year, the higher landed cost of imports may enable the flat product prices (current HR Coil prices at $ 590-593/t ) to move up marginally in the coming months.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal