China’s economy problems pose critical challenge for India’s commodity sector

By: |
Published: February 11, 2020 5:00 AM

According to latest IMF economic outlook projection, the global economy is to grow by 3.4% in 2020, while Chinese GDP  has been estimated to grow by 5.8%. With the outbreak of the recent crisis, Chinese economy may not achieve the projected growth and consequently pull down the global growth also.

Rough estimates indicate that China has already lost around 43-45 million tonne of steel consumption as the domestic market.

The Indian steel industry is on the threshold of a new chapter in its journey. After nearly 8-10 months of a downward slide in prices with rising prices in major raw materials, iron ore and coking coal, steel prices in India since mid December 2019 are on the rise. This is in line with what was happening in the global market. As Chinese export offers and domestic prices in China were picking up each day along with increased realisation in raw materials, the sudden shock of coronavirus on the eve of Lunar holidays in China surfaced.

The virus spread like an instant fire, bringing to a halt all the economic activities first in a big region like Wahun, one of the biggest business centres of China and subsequently spreading to other cities as well, including Beijing. The rapid loss of lives that continues unabated (officially less than 00 and >35,000 affected) has now spread to other countries having merchant trade with China and hence the list is long.

In the commodity market, the role of China is most significant to the extent that capacity, production, marketing and prices of various commodities are largely influenced by the Chinese activities in the past two decades and would continue to be so in the coming years. Rough estimates indicate that China has already lost around 43-45 million tonne of steel consumption as the domestic market has diminished the operations which include production, selling and transportation. The domestic price of HRC has fallen by 9.2% during the last one month. The impact on CR products was 2.3%, while the same on coated products is confined to 1.5%.

The export offer by China for HRC is falling and is quoted at $476/tonne fob Tianjin for SS 400 quality, but there is hardly any taker. As the virus is reported to be spreading through different materials, the impact on all commodity exports by China is phenomenal.

All the export consignment from China is currently subject to rigorous screening and investigation which means that release of these consignments would take a much longer time and may lead to cancellation of the consignments by the importing nations who cannot endanger their peoples’ lives. It is revealed that plant and factory workers already on leave on account of Lunar festival may not join back in the cities and other suburban areas till the scourge of the disease is eliminated totally in the coming months.

Thus, the damage to Chinese economy may not be for the short term only. According to latest IMF economic outlook projection, the global economy is to grow by 3.4% in 2020, while Chinese GDP  has been estimated to grow by 5.8%. With the outbreak of the recent crisis, Chinese economy may not achieve the projected growth and consequently pull down the global growth also.

In 2019, the global crude steel production at 1,870 MT has grown by 3.4% with China leading the list by producing 996.3 MT (a 8.3% rise). Steel production in January 2020 by China would show a decrease which would pull down global steel production. And the scenario would continue at least till May-June 2020. China has been projected by WSA to consume 909.1 MT of finished steel in 2020, a growth of 1% over last year.

If steel consumption gets affected by around 43-45 MT in the short span of one month due to emergence of the crisis, the negative impact in the subsequent months would be more. On a rough estimate of another 3 to 4 months’ time needed to retrieve the base scenario, the impact on Chinese steel consumption would not be less than 100 MT. Chinese steel exports for the first 6 months in 2020 may be bare minimum as it entirely depends on the perceived threat by the importing nations, some of whom may be rather wary of steel imports by circumventing the rule of origin.

And this massive apprehension of the virus invading the contours of individual country is becoming so rampant that it is threatening the import-export scenario not only for steel but for other commodities as well. The resultant effect of poor domestic and export sales on Chinese steel production is enormous. However, the inventory depletion in China is much expected.

China being the single large consumer of merchant iron ore and the leading consumer of coking coal, its poor demand for these materials would relieve the demand pressure resulting in lowering the level of prices in the coming months from the current level of $82.6/tonne (cfr china for 62% Fe) and $ 151.5/tonne (fob Australia for prime low volume coking coal) for iron ore and coking coal, respectively.

This is good news for Indian steel manufacturers. However, the likely challenge for the domestic players would be to look for additional indigenous markets for the reduced export tonnages. The slowing down of engineering exports containing steel may put a downward pressure on steel offtake from the domestic sources. The incremental tonnage requirement must come from the building and infrastructure segments that are likely to consume more steel in the coming months. During the first 10 months of the current fiscal, India has consumed 84 MT of finished steel at 3.7% growth over last year and is likely to finish the year with a consumption of 104 MT of steel. As per WSA outlook India is to consume around 111.2 MT of steel in 2020.

(Views expressed are personal)

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Maharashtra maize crop infested by FAW, Pune worst-hit
2Gold prices off record high level today; may rally to Rs 55,000 by year-end, should you buy or hold?
3Cotton sowing area doubles to 92 lakh hectares