Declining price level in a developing economy, which is perennially suffering from widening fiscal deficits (FD), is good news. While maintaining the country’s FD within 3.3% of GDP by FY19 might be overshot marginally, the inflation management bodes well for the economy.
The latest core inflation reflected in consumer price index (CPI) indicates that price level had increased by 2.19% during December 2018 and the headline inflation represented by wholesale price index (WPI) had gone up by 3.8% during the period. Both are well within the medium-term mandate of monetary policy of the Reserve Bank of India of keeping inflation within 4% +/-2% band.
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Although for medium- and long-term monetary policy perspective, RBI considers the headline inflation, the very nature of CPI being oriented towards the prices of daily necessities of the common man and therefore directly influencing their well being, it is also being taken into due consideration in deciding the monetary policy.
The Brent Crude oil prices had observed a steady downward movement and stood at $56.56/gallon, a 22% drop from $72.11/gallon in April 2018. This had helped the current account deficit (in other words, saving investment gap) to come down, but neutralised by higher level of imports and lower growth in export.
For instance, the total steel imports at 6.7 MT during April-December fell by 1.62% , whereas the total steel exports at 6.4 MT during the period went down by 29.14%. As a result, the CAD that was 1.9% of GDP by FY18 stands at 2.7% of GDP by Q3 FY19. Secondly, the depreciation movement of rupee vis-s-vis dollar from 65.63 in April 2018 to 70.44 in December also contributed to the widening of import bill.
The movement of WPI rates in various steel categories during the past nine months indicates a good signal of the market trends of steel prices. The comparison of the same in major steel categories with the movement of global steel prices and domestic prices may throw some light on this.
WPI for wire rods has increased by 1.6% during the past nine months. During this period, export prices of ex-Turkey wire rods (mesh) have fallen by 16.3% and domestic average prices for 6-mm wire rods rose from `50,157/tonne (all inclusive) in April 2018 to `51,839/t in November, by 3.4%. Similarly, the WPI for HR coils marginally dipped by 0.1% in the past nine months. The Chinese export price for HR coils ex-Tianjin had fallen by 16.3% during the period. The domestic prices of HR coils have moved up from `54,930/t (including GST) in April to `55,541/t in November 2018, by 1.1%.
In a globalised market scenario, it is possible that the degree of decline in domestic prices would be aligned with the price decline in the global market. However, if the rate of decline in the domestic market is lower or behaves in the reverse, albeit marginally, the credit must go to the indigenous demand factor. In case of India, this has actually happened as the above price movement trend would signify.
In a scenario of price decline, it is common that buyers postpone their purchase, especially for inventory purposes. This is also applicable partially for the project-implementing agencies which procure in bulk during upward price scenario. Thus, declining prices sort of escalate the downward movement of demand. The current steel market is reflecting largely a similar picture. The domestic market behaviour would predominantly influence Indian steel market as the global market size is getting increasingly squeezed. The unilateral action of the US to impose restrictive duties under Section 232 on imports of steel and aluminium has resulted in the diversion of exports by South Korea and Japan from USA to India and other countries.
A new phenomenon of quota-based steel trading is becoming the basic rule. The average exports in the past three years form the basis that would determine the quota rule.
While the US is gradually getting into the quota groove with Argentina, Brazil, South Korea and possibly Japan and reworking United States-Mexico-Canada Agreement for North American Free Trade Agreement, the latest safeguard duty imposition with a number of trading partners, including India, by European Union (finalising in early February 2019) would be further restricting the global steel trade in the contraction zone.
The likely provision that unfulfilled volume in a specific quota may also be utilised by one after fulfilment of its own quota would gradually take the quota-based trade to a bilateral or trilateral trade mechanism, a fact far distant from the multilateral trade pattern envisaged by the World Trade Organization. The US and EU (Germany, Italy, Belgium, Turkey and France), apart from South Korea, Thailand and Vietnam, are the majority of export destinations among the top 10 large export destinations for steel in 2017.
China factor in determining the shape of global steel trade is still predominant. The country exported 69.34 MT of steel in 2018 which is 29.1% lower compared to the previous year. It would face quota in the EU, while US-China trade war has not shown any diminishing trend. That leaves South Asia, Middle East, Vietnam and India as export destinations for China in 2019. As China is facing antidumping duty/and countervailing duty and safeguard duties in a maximum number of countries, the pricing of Chinese exports can only be competitive and not below the marginal COP.
A reasonably stable global steel price would, therefore, be a prime factor in stabilising domestic steel prices in India in the coming months.
The author is DG, Institute of Steel Growth and Development
(Views expressed are personal)