India has been pushed to fifth position in crude steel production, one notch lower than the position held for the last three years. Russia and the US are having higher growth rates in steel production than India. There are two fundamental factors ? dip in industrial production, particularly in manufacturing, and slower rate of fixed capital formation, which is taking a toll on production and consumption of steel in the country.
All the available projections on steel demand is based on a manufacturing growth of more than 8-9%, while the actual rate achieved during 2011-12 puts it at around 3% only. The growth in manufacturing has been pulled down primarily by machinery and equipment (-6%), electrical machinery and apparatus (-22.4%) segments. Latest available data reveal that while production of cylinders (HR Coils) has dropped by more than 8% in the first 11 months of 2011-12, Drums and Barrel production (CR Coils) has gone up by a meagre 3%. Negative growth is also observed in production of construction equipment (-0.2% using plates, structurals), airconditioners (-26% using CRC/S), agricultural equipments (- 21% using Rounds, HR/CR, Pipes), mining equipment (-29% using plates, structurals) and refrigerators (-12.3% using CRC/S). Predominantly positive growth has been observed in auto sector which is reflected in the output growth of commercial vehicles (25%), two wheelers (15%), utility vehicles (13%) and auto components (12%), although production of passenger cars (3% growth) was a dampener. Electricity generation has shown a growth of 8.2% over last year which has led to a high demand for electric transformers (more than 17% growth) necessitating high imports of CRGO steel (around 1,10,000 tonnes).
Another critical issue concerning the growth of industry, specifically the capital goods industry which has experienced a negative growth of -4.1% in 2011-12 relates to the massive imports of machinery and equipment containing steel in the recent period. Power sector equipment has been granted duty exemption with lesser CVED to promote faster construction of power plants without granting the equivalent benefits to the indigenous capital goods industry. Similar is the case for duty exemption on import of ship building quality plates and other equipments for vessel manufacturing while denying the same benefits to the indigenous steel plants.
Other worries are rapid depreciation in exchange rate (coking coal import R210/t fob costs minimum R1,500 per tonne additional) and would adversely undermine the profitability of SAIL, RINL, Tata and JSW unless covered by hedging of exchange rate. Exports are not able to fetch higher realisation as in tune with highly competitive market, the buyers are insisting for discounts to make up the differential. The spread between domestic investment and saving which was met through FDI and FIIs has normally been ranging between 2.5-3% of GDP. The current differential has gone up beyond 3.5% which needs a close monitoring.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal