Is the country?s steel industry facing a slowdown in demand? Only a few will tend to believe this and there are no great reasons to do so either, especially in the mid or long term context. The construction industry potential is enormous and a mild slowdown witnessed in the very recent past should be a short affair. Fundamentals for steel demand growth remain fairly strong in the country. However, a possible slowdown in industrial growth may have an impact on certain segments of the industry.
The passenger car sales growth rates have dropped. The auto-component exports business is also faced with a margin crunch with a stronger rupee. The passenger car makers may try price cuts or attractive schemes to boost their sales up in the event of a fall in demand as they see a relatively price elastic demand curve for their
products. The margin pressure may hit steel prices and not so much their volumes. However, steel supply side dynamics are such that, the steel makers will stand strong and not accept any price cut. This story will perhaps be valid for a very large number of industries coming under pressure. But, the steel makers will need price hikes to maintain profitability especially when they are sure to come under a huge cost pressure with significant rise in coking coal and iron ore prices (iron ore prices for those who are dependent on the market, especially the spot market). The global benchmark contract coking coal prices may rise to as much as $140 per tonne. The iron ore contract prices are all set for a 30-355 increase. This will hike the price of scrap in the world market. A slow moving steel market may not support their bid to shift the burden of costs on to the steel consumers. If the market moves into a slower growth track, then there are bigger concerns. But, can it happen?
The inflation rate quoted may not have captured the real increases in costs of living of the population.
There may be a huge desire among people to acquire automobiles or appliances of various kinds, but, all of a sudden, one sees a change in it. This may be the beginning of a downward trend and initial signs of a recession. If ever the current negative consumer sentiments gain ground, even industrial capacity building may see a slowdown. Investment opportunities are fairly high today, but, at the current costs of capital, all of them may not be well tapped. These are not good signs for steel. If the rupee rises further (not likely), the country?s export sector will lose a lot of money. Much of what is being talked about that India can turn into a major industrial hub for the world will get a jolt if the industry is seen to be hit even at this value of the rupee.
The FIIs can keep pouring money into the nation?s stock market and select stocks of the great performers. But, the steel industry does not really gain much from speculative activities.
(The author is strategy consultant, Steel and Minerals)