Steel sector to get boost from government budget spending, credit flow in Q4

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Published: January 8, 2019 1:37:48 AM

A lot of speculations are rife on the probable state of the sector in 2019. Now that Brent crude oil price has declined, it is not likely to go up in the coming 2-3 months, despite the alleged production cuts by Opec.

Steel sector to get boost from government budget spending, credit flow in Q4 (Bloomberg)

A lot of speculations are rife on the probable state of the sector in 2019. Now that Brent crude oil price has declined, it is not likely to go up in the coming 2-3 months, despite the alleged production cuts by Opec (Organization of the Petroleum Exporting Countries). This alone has given some relief to current account deficit (CAD), although its positive impact has been minimised by depreciation of Indian rupee against dollar along with the rise in import arrivals of other items, including steel. The CAD stands at 2.7% of GDP at the end of Q2 FY19, much higher than 1.8% achieved during Q2 FY18.

The wholesale price index during November 2018 at 4.64% appears benign, with consumer price index reflecting more of the common man’s plight at 2.33%. These indices are within the comfort zones of the Reserve Bank of India’s monetary policy guidelines and therefore, the repo rate has been kept unchanged.

As the industry goes through the last quarter of FY19, the budgetary allocations are likely to be spent by various departments as well as the state governments to the fullest. The credit flow from banks is subdued but still is showing growth (scheduled commercial banks’ credit flow rises 22.5% in Q2 FY19 from 21.3% by the end of FY18).

The liquidity problem being faced by the small and medium enterprises (SME) sector, following the rising (non-performing assets) NPAs as a percentage of total deposits of the banks (10.8% by end of Q2 FY19 as opposed to 11.5% by the end of FY18), has been partially addressed by RBI in its latest ‘Monetary Policy Review’. But, much more needs to be done to normalise the critical situation.

Global economy led by US, China and European Union is in a bit of uncertain. The US-China trade war appears to drag on a few months more and no immediate signs are visible, although recent report suggests that duty imposition on Chinese goods has enabled USA to better its deficits. However, it has a negative backlash on Chinese economy.

In addition, both large economies are facing their individual Senate and politburo that are replete with strong divergent nationalistic and liberal views. India’s proposed imposition of retaliatory tariffs is lingering and rightly so, unless a counter-reaction comes from US. The trade battle, in a larger perspective, seems to have been stemmed from the pressure of various political and regional interests.

The internal pressure against the current belligerence by the US President has added new dimensions to the trade war. Among others, the continuation of stimulus measures in USA, Germany (through quantitative easing) may result in cutting unemployment and thereby social tension by improving industrial and service sector output but may have an adverse impact on the capital flows into the emerging economies .

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On the other hand, lowering of Chinese demand for tradable goods after reorientation of the Chinese economy from investment-led to consumption-led may impact adversely prices of raw materials and in some cases, finished product prices, too.

However, India’s domestic economy benefited by rising investment (gross fixed capital formation/GDP ratio posting 29.2% in Q2 FY19 from stagnant level of 28.5% for the past three years), steady private final consumption expenditure (consumption/GDP ratio at 56% in Q2) and a controlled inflation looks evenly poised. On an overall analysis, India would be operating amid a global economy that would prevent sudden shocks and ultimately facilitate global trade. In addition, the index of industrial production (IIP) and manufacturing sector after a gap of more than three years are getting its groove back. During the first eight months, manufacturing grew 5.6% while IIP rose 5.6%.

Particular mention may be made of growth of capital goods (8.7% growth in the first eight months), infrastructure and construction (8.7%) and consumer durable segments (9.4%).

The impact of these favourable factors in Indian economy and the new normal status of the global economy resulted in the production growth of crude steel at 78.9 MT in April-December 2018, showing a rise of 4.3% over the nine months of last year (JPC estimates). As per WSA estimates, India — the second largest global producer of crude steel — has achieved a 5.5% growth in steel production in the first 10 months of 2018.

In the current financial year, the share of major steel producers at 60% may be compared with the significant role played by the SME sector (40% share). While the steel PSUs have 20%, private sector is the major contributor (80%) to the output in the country.

The latter is the major difference in the structure of steel sector between India and China, where state-owned enterprises enjoy good government support.

The lower fall in steel import growth at 6 MT (3.1% fall in first nine months) and significant drop in steel exports at 4.8 MT (38.5% fall) and the gross production growth in finished steel at 97.4 MT (4.5% rise over nine months of previous year) have enabled the apparent consumption of steel at 71.9 MT to grow by a respectable 8.4% in the first nine months of the current fiscal.

At this rate, India may end the current fiscal with a crude steel production of around 110 MT and finished steel consumption of around 98 MT. Are we well on the way to reach 300 MT in the next 12 years?
(Author is DG, Institute of Steel Growth and Development. Views expressed are personal)

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