Decline in industrial growth pulls down steel output

By: |
December 17, 2019 1:21 AM

The issues responsible for the subdued performance of mining and electricity sectors are different.

The market for carbon steel (non-alloying component) has grown by 5.4% in the first 9 months of the current fiscal.

It is seen from IIP figures for October 2019 that a significant drop in output in mining and electricity generation by 8% and 12.2%, respectively has pulled down the growth of industrial output. In the previous month, the drop in production in mining was 8.5% and in electricity it turned out to be 2.6%. These two sectors have a combined weightage of 22.4% and therefore the impact of their poor performance on IIP is much lower compared to 77.6% weightage for manufacturing.

However, it is clear that when the above two sectors had a slow output trend, the indirect impact by way of lower production of manufactured items like excavators, dumpers, cranes, power vessels, steel containers, water treatment plants, transmission line towers seriously reflect in the production shortfall in manufacturing sector which has gone down by 2.1% during the month and by 0.5% during the first 7 months of the current fiscal. The issues responsible for the subdued performance of mining and electricity sectors are different. The mining output is not increasing as demand from steel industry is fluctuating and anticipated closure of leases of the 329 number of private mines by March 2020 (48 operating mines in Odisha, Jharkhand, Karnataka and Gujarat, out of which 24 belong to iron ore) have led to uncertainty of future supply of iron ore leading to a temporary cut down in excavation.

It is apparent from the above list that capital goods sector is passing through a critical phase of development and has gone down by 12% during April-October 2019 and by nearly 22% in October 2019. The sub segments accounting for a major share of the downward trend pertain to pressure vessels, SS tanks, power generating equipment, fabricated metal products, AC motors, electric transformers, material handling equipment, construction equipment, textile machinery, bus bodies, printing machinery, among others. It is pertinent to note that production of railway coaches and wagons, railway locomotives and shipbuilding and parts have maintained a rising output trend.

To find out the answer towards declining trend in electricity generation, the pertinent question relates to demand for electricity. Has it gone down in the recent period? As IIP itself is subdued (-0.5% rise in April-October 2019 period), the demand from industry for electricity is not rising, the different costs and prices of electricity generation in different states are high to adversely impact the production costs of metals (both ferrous and non-ferrous) and other power-intensive sub segments. Further, coal based thermal plants are currently facing opposition from the environmental point of view. The engineering goods exports containing steel from India is also experiencing a slowdown and this may be due to a sobering impact arising out of slower industrial demand from countries abroad.

The automobile production in the first 8 months of the current fiscal year at units has shown a 13.8% decline in output. The corresponding downward pressure on auto component sub segment does not need any explanation. The exports of passenger cars are, however, higher by 5.4% during the period.

Apart from passenger cars which has a combined weightage of 3%, inclusive of auto component sub segment, the other elements in consumer durable sector namely, SS utensils, electric heaters, washing machines, electric appliances, bicycles and coolers are showing reasonably good growth and account for a part of the growth of 3.6% in steel consumption in the first 8 months. The slow growth in infrastructure/construction sector (9.2% decline and 2.4% negative growth cumulatively) summarises the poor demand from building and construction and infrastructure segments (except positive growth in rail and rail materials and pipes and tubes). The silver lining is good growth in intermediate goods (weightage of 17.22%) that have grown by as high as 22.2% in October 2019 and cumulatively by 11.3%, fuelled by reasonably good production level of steel pipes and tubes, hinges, iron cast products, among others.

In the list of manufacturing items, mention must be made of manufacturing of base metals which has observed a monthly growth of 9.4% in October 2019 and has risen by 13.2% during the first 7 months. The production of MS Slabs, HRC/S of mild steel variety and steel pipes and tubes have exhibited a rising trend during the period.

The market for carbon steel (non-alloying component) has grown by 5.4% in the first 9 months of the current fiscal. However the SS and Alloy segment has gone down significantly by 16.6% during the period and therefore, pulled down the consumption growth rate of total steel products to 3.6% only. The declining trend in auto segment is the principal reason for severely under formed alloy segment. The declining rate in PFCE has also impacted the purchase of utensils in SS segment. By November-end the total inventories by the major steel manufacturers dropped down to 13.3 MT which meant a drop in inventories by 48,000 tonne during November 2019. India has now strongly emerged as a net exporter and leading the total imports by 1.3 MT by November 2019 end. The early resolution of US China trade war would surely improve the global steel scenario to facilitate more exports from India.

(The author is DG, Institute for Steel Development & Growth. Views expressed are personal)

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