Steel sector feels assured of steady growth in demand

By: |
New Delhi | Published: August 14, 2018 1:03:59 AM

Last week, we had envisaged a strong IIP growth in June’18 based on a robust growth achieved by the eight core sectors which have a combined weight of 40.2% in IIP released earlier in the month.

Steel sector feels assured of steady growth in demand

Last week, we had envisaged a strong IIP growth in June’18 based on a robust growth achieved by the eight core sectors (crude oil, refinery products, coal, cement, steel, fertiliser, electricity, natural gas) which have a combined weight of 40.2% in IIP released earlier in the month. The growth rate of index of industrial production (IIP) at 7.0% in June firmly establishes the assumption.

It augers well for the steel sector that the pattern of industrial growth that is visible in the first quarter of the current fiscal is inclined towards steel intensive sub-segments. For instance, the sound manufacturing growth at 6.6% in June and 5.4% in the quarter ending June had been primarily contributed by the manufacture of motor vehicles, trailers and semi-trailers (weights: 4.86), achieving a monthly growth of 20.5% (21.6% in the quarter); the manufacture of other transports (rail coaches and wagons, ships, aircraft, etc, with wt. of 1.78) having a monthly growth of 15.6% (12.2% in the quarter); the manufacture of fabricated metals (wt.2.65) having a monthly growth of 11.9% (11.4% growth in the quarter); the manufacture of machinery and equipment (wt: 4.77), attaining a monthly growth of 7.7% (5.2% in the quarter); the manufacture of furniture (wt.0.13) with a monthly growth of 10.6% (10.5% in the quarter). These monthly growth rates are truly significant. It may be mentioned that while the production of SS utensils grew as high as 107.5%, the production of commercial vehicles rose 44% during the month; the output of small transformers went up 4.6%.

From usage-based classification, it is observed that capital goods segment (heavy machineries and equipment) went up 9.6%, infrastructure and construction segment by 8.5% and consumer durable segment by 13.1%. All these are good indicators of industrial growth. The non-food credit growth in the quarter also saw a reasonably good growth. The upward movement of Sensex in the recent period is another indicator for the good fortunes of the innumerable groups of small and medium-sized enterprises across the segments.

The above mentioned growth in the segments is a signal for industrial revival in the country after languishing (2-3% growth) for a sufficiently long period in FY18. As most of these segments owe their near-revival from the orders from infrastructure and construction sectors, the steel industry feels assured of a steady growth in demand. It is necessary that in the medium- and long-term perspectives, the current state of the industry is sustained. The underlying risk factors, however, need not distract the industry from attempting to look for easy solutions.

The first and foremost obvious question is of enhancing capex, specifically in the building of infrastructure. Based on the limited data on the investment front, it is surmised fixed capital formation as a percentage of GDP has improved albeit marginally from the ever-stagnant level of 28.5% for the past three years and has taken it to 29.1% of GDP during the last quarter of FY18. The first stage of Bharatmala programme, a component of National Highways Authority of India (NHAI) projects, has commenced but it remains to be seen if the same can maintain the tempo of activities it has exhibited in the recent past. The second important caveat relates to the flow of private investment (household as well as corporate), especially in sectors like affordable housing (AH), civil aviation and ports. AH has been given a new leaf with the recent policy announcement, making it attractive for higher flow of investment from private sector. The scheme needs a geographical extension by exploring new areas. The raising of repo rate by the Reserve Bank of India (RBI) has prompted some of the financial institutions to reconsider the sops being contemplated in the case of housing loans.

The third issue concerns investment for capacity building in metals and mining areas. While brownfield expansion is rejuvenated with latest acquisitions in Bhushan Steel, Monnet Ispat and Electrotherm — which would be followed by Bhushan Steel and Power, and Essar Steel — would bring in fresh investment, greenfield expansion may take a few more months to commence. Issues on mining are lease agreements and extensions, and rising mining costs that need quick solution.

The last issue is duty hikes on steel and aluminium by the US. It has jeopardised the global trade with frequent announcement of retaliatory tariffs and quota regime by China, the US, Turkey and Vietnam and safeguard investigations by EU. The diverted steel exports from the US by the European Union, Japan, South Korea and China into India have emerged as a stiff challenge to domestic producers to retain their market share and thereby undermining their efforts for capacity-building. Taking advantage of zero duty of Regional Comprehensive Economic Partnership agreements and the duty hike by the US for imports from China, Vietnam and Taiwan, the increase in steel imports from Japan, Korea and China to India is almost matching with the decline in exports to the US. During April-July, India has turned into net importer by 0.56 million tonnes.

(Views expressed are personal)

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