Revival of steel demand: China infrastructure spend supported by issuing provincial govt bonds

By: |
August 5, 2020 3:45 AM

The National Accounts estimates for Q4 in FY20 (Jan-March) estimates the growth in value addition in construction sector at (-) 2.2%.

It is seen that India is the single one among all countries in the world where maximum drop in the level of steel consumption has been projected. It is seen that India is the single one among all countries in the world where maximum drop in the level of steel consumption has been projected.

There is a common agreement that uncertainty in the global economy is hindering the recovery process in the post-pandemic scenario, and the downside risk of virus return is adding fuel to the premise that economic growth is likely to be slower than what was envisaged in June. However, it must be kept in mind that the concern on the annual estimates, made only a month earlier, ought not to be changed merely on the basis of one month’s experience. For making estimates for October, the revision could have been made in September. Empirically, we have seen that when the shutters are half open, there is a normal penchant to suppress the positiveness of the outlook and, rather, to forecast the depression at a higher level. The current stiff challenges faced by the producers in marketing their products make our faith shaken in resilience and tend to perpetuate the subdued outlook.

Thus, it is a little surprising that WSA thought it (July) an appropriate time to come out with a revision of steel demand estimates made in June. A month ago, in the short-range outlook for steel, the WSA had estimated the global consumption of finished steel at 1.654 million tonne in 2020, 6.4% lower than that a year ago. One month later, the global steel market has been assumed it to be better off with steel consumption at 1.660 billion tonne, with growth down by 6.0% only.

The latest available GDP forecasts (mostly revised in June) by IMF, IHS Markit, Oxford Economics and OECD had estimated global GDP to drop between 4.6 and 7.5% in 2020, compared to the previous year. As the financial performance in the advanced economies is contributed by fiscal stimulus, including stronger social safety nets, the steel consumption for them has been estimated higher by 4.0 million tonne between the two months. In the emerging economies, the limited fiscal space constraining the stimulus package and mounting debt and unemployment are slowing down the recovery rate. The exception is China, where huge spending on infrastructure is supported by issuing bonds by the provincial governments. This has improved domestic demands and prices. It is noted that steel demand in China for 2020, which was projected at 916.5 million tonne in June, is revised to be projected at a higher level at 925.6 million tonne — this exceeds last year’s level by 2.0%.

The short-range variations in steel demand projection are guided by the behaviour of a few leading indicators relevant for steel use in the economy, viz construction, automobile, mechanical machinery, industrial production (capital goods, intermediates, consumer durables) and fixed asset investment (captured by Gross fixed capital formation). In totality, the level of steel consumption for the emerging economies made in July is higher by 5.0 million tonne.

It is seen that India is the single one among all countries in the world where maximum drop in the level of steel consumption has been projected. In October 2019, when the first estimation for 2020 was prepared, steel consumption for India was projected at 83.3 MT — showing an annual fall of 18.9% over 2019. The construction sector, the backbone of India and together with infrastructure segment accounting for nearly 68% of steel consumption in the country, was projected to grow at (-) 17.1% raised to (-) 17.9% now for 2020. It is true that Covid-19 and the consequent lockdown periods had a direct impact on this sector. An acute labour shortage affected production in manufacturing. To redress the situation, the government had announced increased fund allocation for affordable housing, housing for migrant workers, housing for migrant workers on rental basis, special household scheme for 60,000 houses, commencement of construction for half-finished dwellings in rural areas and increased fund allocation to MGNREGA to spend on creation of suitable capital assets. It was widely expected that with all these measures construction sector in India would require more steel for the balance period of 2020.

The National Accounts estimates for Q4 in FY20 (Jan-March) estimates the growth in value addition in construction sector at (-) 2.2%. IHS Markit estimates construction sector in India to degrow by 6% in 2020 and grow by over 2% in 2021. The much lower estimates for construction sector by WSA for India in July alone have brought down the demand estimates for India from 83.3 MT (June) to 76.9 MT (July). As it is the highest drop in country-wise steel consumption in 2020, it is interesting to know of constraints and barriers that are specific only to India.

It is mentioned by WSA that impact of prolonged lockdown, being most severe in India, has brought down the demand estimates. One plausible explanation that can be offered relates to lowering steel intensity in construction, which implies that the sectoral growth is not fully reflecting the steel consumption growth as steel use per unit of construction index is coming down. This is partly true as steel cement ratio in the country, although rising slowly, is much lagging the same of developed countries.

During January to June, India consumed 35.0 MT of steel. In H2, the consumption is estimated at 41.9 MT compared to 51.5 MT in 2019. There is also ample scope for higher level of steel consumption in Infra, housing in rural and semi-urban areas and by the railways than what has been assumed by WSA in July estimates.

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