A challenging FY19 awaits domestic steel industry

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Published: June 5, 2018 1:47:25 AM

The GVA in manufacturing and construction rose by 9.1% and 11.5%, respectively in the last 3 months of FY18.

steel industry, indian steel industry, steel industry FY19The IIP indices for manufacturing and industry (both rising at 4.4% rate over last year in FY18) have been significantly buoyant. (Reuters)

The IIP indices for manufacturing and industry (both rising at 4.4% rate over last year in FY18) have been significantly buoyant. The same upbeat resilience is also observed in the macro economic data released recently by CSO on GVA and GDP estimates for the country for Q4 of FY18 and for the full year as well. During January-March quarter, GDP growth at 7.7% (over and above 7% growth in Q3) had pulled up the average rise of GDP to 6.7% in FY18, the highest in the global scale. The trend of a few other indicators in Q4 having large impact on movement of downstream industrial products needs special mention.

The GVA in manufacturing and construction rose by 9.1% and 11.5%, respectively in the last 3 months of FY18. This is against 6.1% and (-)3.9% growth in these two elements in the corresponding period of the previous year. The major rise in both these sectors happening after so many months had taken the growth potential of Indian economy to a new height. Indian steel industry can now look forward to a stable flow of orders from both manufacturing and construction segments.

It would bring back stability in the demand pattern for steel from both these streams. The rate of increase in private final consumption expenditure is a bit subdued. Indian economy is consumption-led as the share of PFCE in GDP at 55.8% is predominant leaving a 10.8% share to government consumption in GDP. A higher growth rate in government consumption from 9.9% in FY16 to 10.8% in FY18 is in tandem with the practice of enhancing spending by the government.

It is gratifying to note that gross fixed capital formation as a percentage of GDP has moved up to 29.1% in Q4 to lift the average share to 28.5%. It has reflected in maximum order flow to steel fabricators in the last quarter of FY18. Investment already announced and implemented in phases in respect of Bharatmala (road-led), Sagarmala (port-led), Railways (doubling of lines, gauge conversion, high-speed rails, metro rail, DFC), Defence (indigenous procurement of arms, ammunition, ships, submarines and warcraft carriers) is significantly higher than the previous years.

It has cut short the subdued business sentiments captured by the monthly Purchasing Managers’ Index and signals a higher expectation in the market on mega investment trend and this in turn is prompting the private corporate sector to enhance its capex component. The capacity augmentation plans by the PSUs and major private sectors in areas of steel, coal, aluminium, automobile, heavy machineries and equipment, shipbuilding, power and consumer durables would enhance the capital flow and a robust multiplier impact on demand and supply pattern of the commodity sectors and other critical segments of the economy in the coming months. The GVA growth in agriculture at 4.5% in Q4 is better than last quarter, but still lower than the previous year.

The rising brent crude oil prices ($78 per gallon) may act as a dampener in this rising saga of our economy. It would impact the CAD adversely and deplete the investible resources of the government. The large NPAs of the banks with predominant share by the defaulting big steel players specifically the PSBs have already hurt the institutional credit flow. There is a likelihood of interest rate hike in the coming monetary policy announcement by RBI resulting in costlier credits for investment as well as for working capital needs.

Both the US and the EU are expected to raise interest rates in the following months and flight of capital (FII) to some extent from India cannot be entirely ruled out. A 7.9% growth in steel consumption in the country much ahead of GDP growth in FY18 establishes the premise that in a rising economy steel demand growth is ahead of GDP growth rate. The primary caveat for sustaining this rise in steel consumption is to improve further the share of GFCF in GDP in each quarter ahead. As mentioned earlier the green shoots are clearly visible and these need to be nurtured by careful planning and strategies.

During FY19 the settlement of NCLT referred cases of Bhushan Steel, Monnet Ispat, Electrosteel Castings and Essar Steel should make additional 11-12 million tonne of steel readily available. Each of these steel plants is capable of adding another 15-17 million tonne of steel available in the next years. It may also open up plausible entry of global players in India with higher focus on innovative technologies and high value added steel. An uninterrupted cycle of public investment in infrastructure can only pull up the fortunes of all stakeholders participating in India’s economic growth in FY19 and beyond.

DG, Institute of Steel Growth and Development

(Views expressed are personal)

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