​​​
  1. Manufacturing boost for steel sector in industrial production data

Manufacturing boost for steel sector in industrial production data

The New Year has brought us the good news that manufacturing sector, after a gap of many months, had moved up by 10.2% in November 2017 which pushed up the overall industrial production rate to 8.4% in the month.

By: | Published: January 23, 2018 4:12 AM
steel sector, industrial production data, NSP 2017, GDP in the country, Global Economic Prospects, World Bank, IIP growth, GDP rate, india,  industrial sector The much talked about target of reaching 300 million tonnes of crude steel capacity in NSP 2017 is dependent on market absorption of minimum 240 million tonnes of finished steel by the end of FY31.

The New Year has brought us the good news that manufacturing sector, after a gap of many months, had moved up by 10.2% in November 2017 which pushed up the overall industrial production rate to 8.4% in the month. If it sustains, it would make a paradigm shift to the fortunes of a few critical commodities that have been languishing or growing at much below their potential in the past and steel is one of them. The much talked about target of reaching 300 million tonnes of crude steel capacity in NSP 2017 is dependent on market absorption of minimum 240 million tonnes of finished steel by the end of FY31. During the first 9 months of the current fiscal, the country consumed 64.9 million tonnes of steel which shows a 5.2% rise over the previous year and it is likely that India would end the year 2017-18 with a level of 89.1 million tonnes of steel (around 6% growth over last year). The crude steel production has reached 75.6 million tonnes with a yearly growth of 4.8%. Currently, the market prices of all commodities are on the rise, some due to the rising global prices like oil, coking coal, iron ore and some due to the enhanced demand from end using sectors on account of restocking, higher demand emanating from a likely market-friendly Budget in terms of increased investment and a clearer roadmap from GST, improved export scenario (India net exporter of 1.6 million tonnes in April-December 2017).

During the last 6 years (2011-12 to 2016-17) the steel consumption has a growth coefficient (elasticity) of 0.92 with industrial production which means industrial production is one of the primary determinants of steel consumption. In the same period the elasticity of GDP with industrial production remained at 0.55. This reiterates the fact that GDP in the country is contributed significantly by non-secondary factors, namely tertiary and primary sectors. The World Bank in the recent report on Global Economic Prospects has predicted 7.3% growth in India’s GDP for 2018 and 7.5% for 2019 & 2020. Assuming an average GDP growth rate of 7.5% during 2018-19 to 2020-21 and an average GDP rate of 8.0% during 2021-22 to 2030-31, we get a derived IIP growth of 4.1% in the next 3 years and an average rate of 4.4% in the next 9 years.

This may be unacceptable in view of the fact that in 2016-17 we had seen IIP growth of 5% and the low value of elasticity during the past 6 years was influenced by poor IIP ranging between 3-4% in most of these years. If the current optimism sustains in the next decade and there is no reason why this should not happen in the context of stable growth in automobile, engineering and other processing industries, IIP growth of 6-7% in the next 3 years (Phase-1) and 8-9% growth in the next 10 years till 2030-31 (Phase-2) is plausible. In the same analysis, steel consumption in the country has a direct correlation with industrial growth. Though roughly around 62% of steel consumption is accounted for by the construction and infrastructure sectors and the balance 38% by the industrial sector, it is apparent the growth in construction and infrastructure is very much linked with the availability of machinery, equipment and tools made by manufacturing segments like machinery and equipment, electrical machinery, manufacture of vehicles, trailers and of other means of transport like railways, shipping, aircrafts, among others. A steady growth in capital goods, consumer durables and intermediate segments would only ensure an uninterrupted growth momentum in construction and infrastructure segments and thereby in the industrial production.

The past movement of IIP and steel consumption during 2011-12 to 2016-17 indicates that for every 1% growth in IIP, steel consumption moves up by 0.92%. Based on this relationship, an IIP growth of 4.1% in the first two years following 2018-19 would imply a 3.8% growth in steel consumption. Assuming the revised IIP growth rate as explained above, steel consumption would enjoy an average growth of around 6-7% in Phase-1 and around 8% in Phase-2. In absolute terms, the current level of steel consumption at 89.1 million tonnes by 2017-18 as calculated above, is likely to reach 107.6 million tonnes by 2020-21 and a level of 232.4 million tonnes by 2030-31. Thus the growth of finished steel consumption which would determine if the country is going to achieve an installed capacity of 300 million tonnes, crucially hinges on how IIP drives GDP growth by having a more steel intensive pattern of growth in the next 13 years.

(Views expressed are personal)

Get live Stock Prices from BSE and NSE 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.

Go to Top