Sector emerges from uncertain global prices,expects brighter future: Sushim Banerjee, DG, Institute of Steel Growth and Development

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Published: January 1, 2019 1:58:46 AM

At the end of 12 months of 2018, Indian manufacturing industry can look back at the sector’s performance with a great deal of satisfaction and an anticipated brighter future.

The movement of Wholesale Price Index (WPI) for specific steel products during the past 12 months would provide an answer.

At the end of 12 months of 2018, Indian manufacturing industry can look back at the sector’s performance with a great deal of satisfaction and an anticipated brighter future.

The sector, which clocked 4.9% growth in January 2018, achieved growth rate of 7.9% in October and showed signs of maintaining a rising momentum to finish the year. It also coincided with an average growth in steel consumption of 8.4% during April-November. One of the primary fallouts of a rise in sector’s performance rests with the rise in realisation as demand growth supports upward movement in prices.

On an overall analysis, the movement of Wholesale Price Index (WPI) for specific steel products during the past 12 months would provide an answer.

In January, the manufacturing sector’s WPI at 114.7 rose to 118.8 in November, a rise of 3.6%. The same indices for long products, hot rolled (HR) coils, cold rolled (CR) coils and galvanised plain/ galvanised coil (GP/GC) in January were 102.9, 111.1, 106.2 and 112.7, respectively. During January-November, the same indices moved up by 8.9, 9.4, 11.9 and 11.9%, respectively. It is apparent that had demand growth been slower than actually observed, price growth would never have actualised.

One of the major determinants of steel prices pertains to major raw material prices, namely, coking coal and iron ore. The prices of Iron Ore Fe-62.5% in January 2018, imported by China at $74.6/t cfr, fell marginally to $72.3/t in December. Prime coking coal at $209/t fob Australia in January also decreased to $204/t by December. One tonne of steel requires around 1.6 times iron ore and around 8000-kg coking coal.

Major Indian producers, with blast furnace-basic oxygen furnace (BF-BOF) route of steel-making, use domestic coal after blending with imported coal to reduce ash content and therefore import prices of coking coal heavily influence domestic steel prices. In addition, around 15% of producers using non-coking coal have to blend imported thermal coal with indigenous non-coking coal to produce steel. With the cut in customs tariff by India, the global steel price movement has a corresponding influence on domestic prices.

The domestic prices of iron ore as well as of coal by Coal India have an inherent mechanism of aligning with ruling international prices. Recently, it is often observed that domestic prices move in tandem with international prices even if the domestic demand growth dictates otherwise.

This phenomenon can be explained in view of low-capacity utilisation in steel (the current average steel capacity utilisation in India being 75% in FY18). Demand growth attracts higher steel flow into the economy by utilising the idle capacity and prevents the expected price rise.

Global steel prices have seen a fluctuating movement in 2018. While the first half of the year saw a rising trend, the later half observed a decline.

The Chinese offer for HRC SS-400 ex-Tianjin port, ruling at $571/t in January 2018, rose to $590/t in June, a rise of 3.3% and subsequently dropped to $484/t in December, a fall of 18%.

Meanwhile, Indian domestic HRC prices at Rs 42,000/t (excluding GST) in January soared to Rs 45,750/t in June, a rise of 8.9%, and subsequently dropped to Rs 42,000/t in December, which is an 8.2% fall.

Similarly, with respect to long products, while Turkish export of Reinforcing Bar (Rebar) went down marginally from $560/t fob in January 2018 to $550/t in June and later fell to $455/t in December, a drop of 17.3% during the past six months. The domestic prices of Rebar at Rs 47,490/t (all inclusive) in January rose to Rs 50,920/t in June, a rise by 7.2%. Subsequently, it fell 3.8% to Rs 49,000/t in November.

During the past 12 months, fall in exchange rate was instrumental in raising the landed cost of imports. Rupee at 63.63 versus dollar in January 2018 dipped to 67.79 in June and then settled at 70.04 in December.

In the coming months, the domestic steel demand scenario in terms of price movement is likely to be robust due to increased investment in infrastructure by the government and a stable manufacturing growth buoyed by rising demand for steel intensive segments in capital goods and consumer durables. However, Q1 in FY19 would coincide with general elections and therefore may exhibit price weakness. It has been predicted that all the major advanced countries would have to sustain growth to bring down social unrest.

In all probability, stimulus measures would be continuing in the US, European Union, Middle East and possibly in China to sustain the GDP growth, lower rate of inflation, rise in employment rate and less hardship for the poor.

This would imply that downward pressure on domestic steel prices on account of subdued global market would be much less and domestic demand growth would continue to play a predominant role in determining indigenous steel prices.

(Views expressed are personal)

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