Steel Consumption: How GDP growth influenced sector

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Updated: March 3, 2020 7:44:19 AM

There is another view that the composition of GDP among the three critical sectors — agriculture, industry and service — would determine the growth path of the commodity segments.

Steel Consumption, GDP growth, steel industry, GDP composition, infra projects, infra sector, industry sectorThe most critical indicator of steel consumption in India is defined by fixed capital formation as per centage of GDP.

The general view of the current status of Indian economy is that it has reached the lowest level and Q4 onwards the growth momentum would commence. This perception is a true reflection of what is happening in the steel industry. GDP growth that subsumes all economic activities in the country has influenced the commodity sector in many ways, direct and indirect.

There is another view that the composition of GDP among the three critical sectors — agriculture, industry and service — would determine the growth path of the commodity segments. And each of the commodity segments belonging to different sectors would flourish if the sector concerned contributes more to GDP growth. It is widely known and has been theoretically established that steel intensity in agriculture exceeds that in the service sector but much lower than the industry sector comprising mining and quarrying, manufacturing, electricity, gas and water supply, and construction.

Last three years’ analysis of GDP composition shows that the share of agriculture came down from 15.1% in FY18 to 14.4% in FY20 (second revision), while share of service segment went up from 53.4% in FY18 to 55.4% in FY20. The share of industry segment, however, remained constant at 30-31% in the last three years. Steel consumption in the country has gone up 7.9% in FY18, 8.8% in FY19, and is likely to be 4.5% in FY20. If the share of industry remained constant on an average 30.5% of the GDP, the reason why steel consumption growth has been rising in the last three years may be explained by rising steel intensity in the industry sector.

Both consumption and investment expenditure can raise the volume of consumption of a specific product widely used as a critical input for both consumption and investment. Share of private consumption in GDP has been ranging between 56% and 56.7% in the last three years. The purchase of consumer durables, automobile and real estate expenditures are included in this and steel content in these areas are facing stiff challenges from plastic, aluminium and composites, and also concrete. The long-term advantage of steel use particularly in life cycle cost analysis is yet to be fully appreciated by the real estate developers and consumers. However, with regard to infra assets, there is no reason why the country should not mandatorily opt for the choice of materials that would ensure a sustainable asset lasting for the next few decades. This would significantly save public investment, which is spent on maintenance of these assets year after another. Attitudinal changes in project implementation agencies in both state and central governments towards creation of sustainable infra assets continue to be a stiff challenge for the steel industry.

It is observed that the share of government consumption in GDP has been rising from10.2% in FY18 to 10.6% in FY20. The construction of office buildings and residential quarters for government employees; beautification of the cities, including flyovers; ROBs constructed by PWD, CPWD and other government agencies fall in this category. The LCA analysis is yet to be considered by the government agencies, which would have firmly established steel as the first choice of materials.

The most critical indicator of steel consumption in India is defined by fixed capital formation as per centage of GDP.
In terms of GDP at market prices, this ratio at 28.1% in FY18 reached 29.0% next year and is currently pegged at 27.5% in FY20. The investment expenditure in the economy has increased 14.5% during FY18 and FY19.

However, in FY20 the growth rate came down to 1.9%. There are two aspects to be considered at this stage. First, investment expenditures comprise infra investment (rail, road, ports, airports, irrigation, energy, housing, mining, oil and gas and petro chemicals) and also that on social sector (health and family welfare, education, water supply, food processing). Thus the component of infra investment in total investment is what is significantly important for the steel industry. In FY18 and FY19 around Rs 10.2 lakh crore and Rs 10 lakh crore, respectively, comprising 5%-6% of GDP were invested in infra sector. This can be compared with 13%-14% of the GDP spent in China on infra investment. Secondly, infra projects normally spill over to next one-two years and for big steel plants these are three-four years, if not more. It is imperative to keep this in mind as requirement of steel is much more in the initial stages of civil construction, and a large part of investment in the second stage is for provision of utility services.

Thus, while a rising stability in GDP growth is a prerequisite for growth of the steel industry, it is infra investment ratio as a percentage of the GDP that would result in an increasing share of industry is the prime mover for growth of the steel industry.

In FY20 consumption of TMT bar and galvanised/coated products have achieved two-digit growth rates, which indicate increasing use of these categories in infra and consumer durable goods. These provide encouraging signals for the industry.

(Views expressed are personal)

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