Consumption of steel is one of the leading indicators of economic development of the country. As the country passes through the developing phase and successfully enters into the developed stage, as experienced by the US, Japan, UK, Germany and Italy, the steel consumption curve takes the shape of an inverted-U.
The sophistication in requirements by various end using sectors and dynamic changes in household choices lead to growing demand for value-added, lightweight and high performance steel.
But there is an exception to this time-tested rule. The Chinese economy, for instance, exhibits some of the important indicators of a developed economy, particularly with regard to major risks associated with long-term growth of the economy and, at current 7.7% GDP growth, continues to baffle the protagonists of this slowdown theory in steel consumption.
It is well established that Chinese steel consumption is primarily supported by a high level of Fixed Asset Investment (FAI, measured by Gross Fixed Capital Formation) which is still continuing at 48-50% of GDP. A major part of it flows to the infrastructure sector. This feature distinguishes the Chinese economy from other developed economies with FAI as a percentage of GDP at a much lower level in the US at 19.4%, Germany at 17.5%, UK at 14% and Japan at 20.7%.
These economies are characterized by a higher level of consumption expenditure as a percentage of GDP as compared to China. Higher level of consumption expenditures (both by the government and households) leads to demand for low volume, value-added steel, including stainless steel.
The financial meltdown of 2007 followed by the sovereign debt crisis in the euro zone has made a huge impact on the developed status of various economies. Battered economies in the West are eagerly looking for large scale government intervention in areas of investment by way of stimulus measures, guiding banks to provide credit to relieve the debt crisis and bring stability to the euro.
We discussed last week about the revival of the US economy reflected in more than 2% GDP growth, reduction in unemployment rate, growth in industrial production at 3.7%, improvement in CAD at (-)2.5% of GDP. All this backed up by strong stimulus measures by the federal government with no drastic quantitative easing (monthly purchase of $75 billion worth of bonds) has rejuvenated the US steel industry with more government orders (government procurement favouring steel made in the US), less inventory, higher capacity utilisation by the industry and more availability of shale gas benefiting new DRI capacity.
Recent report shows that the British economy is also in revival mode with higher GDP, drastic fall in unemployment and growth in industrial output, all backed by strong government intervention. In all probability this would reflect in higher demand for steel, higher level of capacity utilisation. It is also likely that as the proportion of investment by the government in infrastructure development would be higher than what we observed in earlier years, demand for steel would be more than what is warranted by the developed stage of economic growth experienced by these countries. It only proves that standard theories of economic development connecting growth with commodity demand need to be revisited in the context of recent developments.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal