Industrial growth to leverage steel industry

By: |
December 18, 2018 12:10 AM

The Index of Industrial Production (IIP) growth of 8.1% in October is encouraging. There has been a stable upward trend in the industrial output for the past few months.

Industrial growth to leverage steel industry

The Index of Industrial Production (IIP) growth of 8.1% in October is encouraging. There has been a stable upward trend in the industrial output for the past few months. The manufacturing sector (weightage: 77.6%) has grown by 7.9% during the month and pulled up IIP growth.

It is also gratifying to note that mining sector (wt: 14.37%) has tasted growth of 7% in October due to low base in the previous year. This sector was languishing in the past few months due to the capping in production of iron ore in Karnataka and Odisha and delaying of coal mine auction. The electricity generation has also grown by a respectable 10.8% during the month.

The month of October had indicated a healthy growth in capital goods sector, the predominantly steel-intensive sector, to rise by 16.8%, followed by infrastructure and construction sector to grow by 8.7%, consumer durable sector by 17.6% and the intermediate goods sector by 1.8%.

These sectors together represent 53.5% in use-based definition of IIP and have contributed to growth in steel demand. The October data has assessed a 21.9% rise in the manufacture of machinery and equipment, and the segment is the beneficiary of a stable growth in auto sector. The manufacture of motor vehicles and trailers has seen 16.1% rise in the month, followed by 24.8% growth in other transport segment (rails, ships and aircraft).

The commercial vehicle segment alone saw a production growth of nearly 43% in October. The manufacturing of furniture (not entirely steel-based) has grown by a spectacular 41%. Low base in the previous year is partially responsible for this.

Growth in infrastructure and construction sector may be taken as prime driver for resultant growth in the demand for capital goods, consumer durables and intermediate goods. This linkage in fact goes beyond the individual sectoral weights contributing to the IIP growth. In other words, the weightage of 12.33 by infrastructure/construction sector provides the basic push and drive to activate capital goods, intermediate goods and consumer durable segments (combined weight: 38.3% in IIP).

It is not in any way underplaying the role by the rising trend in per capita income and financing of home loans. These steel-intensive segments have been able to cater to the growing domestic market but a part of the demand has also emerged from the export of engineering and other items, belonging to these segments. This trend must continue at a much higher level. The exports of automobile and auto components are growing but are likely to achieve a higher growth in coming months on the account of more local facilities being created by auto majors.

The reforms being put in practice for project clearance, enacting contractual obligations and External Commercial Borrowing (ECB) would create an enabling environment for the multinationals to set up manufacturing capacities in India. This would cater to the quality-conscious customer segments, improve domestic competitiveness and help earn foreign exchange by exporting those products.

It needs to be kept in mind that the growth rates in particular sectors may undergo a change subsequently as October 2018 figure just released is based on the first revision of September data and the final revision of July data. However, a robust positive growth in particular sector signifies more activities, higher order booking and higher capacity utilisation. These are also reflected in positive Purchasing Managers’ Index (PMI) data for Indian manufacturing for the month which is assessed at 53.1 and exceeding 52.2 in September.

A positive result on the industrial segments in October 2018 has led to growth of steel consumption during the month at 8.2%. However, the growth percentage is obtained by 19.4% rise in imports of finished steel and a drop of 23.1% in finished steel exports and stock accretion by nearly 2-lakh tonne finished steel at the producers’ end. Thus, there are internal challenges in an overall growth-oriented scenario.

It is certain that there is reluctance by consumers to procure steel for inventory purposes as prices fall in the past 2/3 months. Steel prices in the indigenous market are being influenced by drop in global prices.

HRC prices (China: ex-Tianjin for SS 400) have come down from $580/tonne free on board (fob) in July 2018 to $480/t in December , a fall of 17.3%. For long products, the rebar export price (Ex-Turkey) dropped from $540/t fob to $ 465/t, a fall of 13.9% during the period.

The price drop was accentuated by capping stimulus measures in China and European Union (withdrawal of Quantitative Easing), fall in property market and the aftermath of US imposition of duties on steel and aluminium. The prices of raw materials, iron ore and coking coal have been seeing a fluctuating trend influenced by shifting pattern in Chinese demand and logistic issues, but are operating within $65-70/t band for iron ore and $210-218/t band for coking coal which has made the difference between prices of raw material and finished product getting narrower.

The push-up factors of domestic demand fuelled by increased investment in infrastructure and construction sectors (Gross Domestic Capital Formation going up from 28.5% in FY18 to 29.2% in Q2of FY19) and the robust growth in manufacturing as discussed above would partially neutralise the negative factors operating in the global market. .
(Views expressed are personal)

The author is DG, Institute of Steel Growth and Development

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