As was widely anticipated, GDP growth in first quarter of the current fiscal slowed to 7.7% against 8.8% in Q1 of the previous year. The worst offenders are mining (5.6%), manufacturing (3.4%) and construction (6.5%). No wonder steel production went up 7.6% and consumption of steel came down to 1.5% during the period. At the beginning of the year, steel demand was projected to grow by a minimum 10-11% following a similar pattern in the previous year.
Prices were rising and margins were better than earlier. Things changed from June. Sovereign debt problems in Europe and downgrade of overspent US economy with consequent weakening of the dollar paved the way for a free fall in demand and prices.
Production cuts are being planned by global steel producers to avoid inventory buildup. Adverse impact on Indian economy proved beyond doubt that the economy is truly globalised. Amid a steep rise in food prices, the only silver lining relates to agriculture which has grown by nearly 4% in Q1.
Recent studies have put GDP elasticity with steel at 1.14, which implies steel consumption to grow by around 9.1% if GDP grows by at least 8% in 2011-12.
However, there exists a great deal of annual fluctuations and in short-term perspective the relationship may not be direct. For instance, in Q1, as per official figures, steel consumption is up by 0.9% and in the first four months of the current year by 0.7%. Thus, even to achieve an annual growth of 8% in the current fiscal, a growth of 11.6% in steel consumption is to be ensured in the remaining eight months. This is a stupendous task and appears to be incompatible with the present scenario. World Steel Association may shortly revise its previous prediction on steel consumption (13.6% for 2011). Lack of authenticity of monthly official figures on Indian steel consumption prevents any comparison of data in H12011 with previous year. But the conclusion is inescapable and it strongly signals a much lower steel consumption in the current year. Can this downward journey be reversed?
With the immediate commencement of four or five ultra mega power plants, three or four greenfield steel plants, four petroleum and refinery projects, at least fifty new and lengthy flyovers, 7,000 km of new roads, 100 new residential complexes each comprising 50 towers, the list is long and unending. Someone is to blow the whistle. When?
The author is DG, Institute of Steel Growth and Development. The views expressed are personal