Regional variations in output only show uncertainty in global steel market

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Published: October 2, 2019 1:04:16 AM

While policy support from the government in monetary, fiscal and trade areas is all set to boost the local demand and raise the animal spirit in the private corporate sector, the thrust on steel exports by strengthening presence in the neighbouring and emerging destinations would pay off dividend.

During FY19, these three sources accounted for 67% share of total steel imports to India and in the first five month of the current year, this share at 2.5 MT has reached 68%.

Global crude steel production in first eight months of the current year has risen 4.4%. The region-wise status is somewhat showing a different picture. Steel production in 28 countries in European Union is down 3%. Germany, France, Italy and Belgium have seen lower production, and Spain had a marginal rise.

Production in other Europe, predominated by Turkey, is negative. This region is undergoing a steep decline in domestic demand. After the unilateral imposition of 25% duty on all steel imports to the US in March 2018, steel exports from most of the EU countries got affected and the damage could not be made up by limited growth in their domestic markets.

As a retaliatory step, EU announced a Quota cum Safeguard duty against all the exporting countries to EU which impacted steel exports from Turkey and China maximum. The downturn in automobile sector first took its toll in the European market. The journey towards EV was hesitant and with the infrastructure sector and property market lagging despite doses of stimulus measures, the cut in production was inevitable. EU exports to Asia, however, continued. India received a total volume of 0.3 MT steel imports from Belgium, Spain, Italy, Germany, Poland and UK during April-August 2019.

During the first eight months of 2019, the Commonwealth of Independent States (CIS) countries have matched the production level of last year. The lower production in Russia and Kazakhstan has been made up by higher production by Ukraine.
The lack of domestic demand always prompted these producers to maximise exports, but with the current restricted global trade reduction of production has to be resorted. The US is the only exception that has increased its domestic steel production in the NAFTA block.

Thanks to the unprecedented protective step adopted by the US, the level of steel imports at 20.7 MT during the first eight months to the US is down by 14%.

A 4.1% rise in steel production during the period is also accompanied by improvement in other macro parameters. While GDP is rising at 2.3%, the unemployment rate has come down to 3.7% in August. Additional duties on Chinese goods have enabled the US to bridge the balance of payment gap with China and resulted in the CAD to drop to only (-) 2.2% of GDP. The rise in the rate of interest has led to more FDI flows into the country. A slew of stimulus measures by the Federal Government including government expenditure on infrastructure building and private investment in the real estate market have sustained domestic demand.

Around 4.2% growth in steel production in the West Asia countries during the period is surrounded by political uncertainty in the region with intra ME conflict, escalating between the two major steel producing countries — Iran and Saudi Arabia — and this might impact steel exports into this region from countries like India. The Asian region remains the single zone that has exhibited 7% rise in steel production. It is led by China, India and Vietnam.

Overall, a significant share of the diverted exports from the US and EU, by the three largest exporters, namely China, South Korea and Japan, came to India. During FY19, these three sources accounted for 67% share of total steel imports to India and in the first five month of the current year, this share at 2.5 MT has reached 68%. The challenge for India was more critical as both Japan and South Korea under the Regional Comprehensive Economic Partnership (RCEP) are entitled for duty-free access.

The exemption from 12.5% basic duty was a major advantage for these two Asian countries to enhance their penetration into Indian steel market and it would continue unabated unless the review of adverse implications on steel industry under RCEP makes it possible to put a stop on this. Thus, regional variations in steel production have only highlighted the uncertainty in the global steel market. The silver lining is visible in gradual return to normalcy in major countries of EU, NAFTA and Asia, together comprising 89% share of global steel production. Manufacturing PMI is gradually coming out of contractionary mode.

The apparent steel consumption in India has grown 6.1% during the first five months of the current fiscal. To spruce up domestic demand, the government had recently effected a drastic cut in corporate taxation to boost private corporate sector’s investment in infrastructure and housing. A cut in interest rate and facilitating credit flow to the SME sector (which includes FMCG sector) would encourage higher capacity utilisation, more demand for steel containing household goods and the continuation of brownfield expansion by steel majors.
The above developments had an immediate impact on steel prices.

The benchmark export prices of standard grade HRC (SS-400) ex-Tianjin port, China moved up to $573 in September 2018 before falling to $453/tonne in late September 2019. The US domestic price of HRC went up to $946/t in September 2018 before dropping to current $589/t.

Similar trend is also observed in Indian HRC prices. While policy support from the government in monetary, fiscal and trade areas is all set to boost the local demand and raise the animal spirit in the private corporate sector, the thrust on steel exports by strengthening presence in the neighbouring and emerging destinations would pay off dividend.

(Views expressed are personal)

 

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