Thrust on steel exports led to higher capacity utilisation: Sushim Banerjee

Posted on 15 January 2020

Source: Financial Express

Commodity prices have seen some upward trend in the past few weeks. Iron Ore prices (Fe 62% at China port) have moved up from $84.6/dmdt in November’19 to $93.25/dmdt in January’20. Coking coal prices FoB Australia has gone up by $13/tonne during the last two months. Similar trend is observed in aluminium, copper, zinc prices. Along with prices of major raw materials, there is a marginal rise in demand for steel, primarily for restocking purposes. In October’19 there was a general feeling in the market that steel prices have reached the bottom.

The current rise in price of steel reflects an anticipatory growth from that bottom point. A number of factors explain this movement. The third and fourth quarters account for growth in government consumption and investment by the PSUs to make up the shortfall in capex undertaken consciously by them in last two quarters. The private consumption expenditures for real estate, consumer durables are to take advantage of the discounts for a limited period provided by the house builders, automakers and other durable goods manufacturers to get rid of surplus inventories.

Despite stiff competition in the global market, the export of Indian goods is continuing unabated. Total steel exports during the first 9 months of the current fiscal at 8.7 MT has shown a growth of 36.4% and with total imports being lower by 12.6%, India would emerge as a big net exporter of steel by year end. The thrust on exports has enabled steel producers to experience a higher capacity utilisation. Despite being a net steel exporter India’s total value of steel imports (including melting exports of 5.1 MT, miscellaneous steel and ferro alloys) exceeded total value of exports by nearly `2,000 crore. Globally the governments are taking steps to enhance flow of funds in specific sectors. For instance, Chinese government is reforming the property market to sell off unsold houses, infra investment in USA by the federal government are leading to demand push for commodities like steel and cement. The price trend in steel is an offshoot of all these events.

HRC export price ex-Tianjin China (SS 400) went up from $ 433/tonne in November ’19 to $ 491/tonne in January ’20. Rebar export price FoB Turkey rose from $412 /tonne to $ 491/tonne during last two months. US domestic prices for HRC increased from $ 498/tonne to $ 600/tonne during the period. Political tensions led to rise in oil prices thereby raising the import bill for all oil importing countries including India. Local HRC that was available at Rs.34500/t ex-works Mumbai (without GST) in November’19 is currently ruling at RS.37000/t.

The first advance estimates of National Income 2019-20 pegs the GDP growth (at 2011-12 prices) at 5% and 7.5% at nominal prices as compared to 6.8% and 11.2% of last year. The 5% GDP growth for FY20 for India has also been projected by World Bank and RBI. As the global economic slowdown has pervaded almost all the countries, the 5% GDP growth attained by India is lower compared to only a few countries, namely Bangladesh (8.1), Cambodia (7.0), Vietnam (6.8), Myanmar (6.6), China (6.1), Philippines (5.8), Mongolia (5.7), Egypt (5.6) and a few small countries in Europe and Sub-Saharan Africa.

The per capita income at Rs 1,35,050 shows an annual growth of 6.8%. In the sectoral trend, GVA growth in agriculture is nearly at the same level as last year which looks promising under the circumstances, the mining sector exhibited a higher GVA. The lower growth in manufacturing, electricity, gas and water supply and construction sectors need to be substantially improved in the coming years to enable steel industry achieve a capacity creation of 300 MT by 2030. One single factor that can make a significant reversal of the current picture is to find out ways and means to raise the rate of GFCF (at market prices) as a per centage of GDP from the current rate of 31.1% (constant price) to a minimum 35% or by providing around Rs 5.80 lakh crore (at constant price) towards public investment and specifically in infra.

The latest report on National Infrastructure Pipeline has focussed on the dire need of raising infra investment substantially from the average 10.1 lakh crore in the next six years. There are concerns on violating the norm of fiscal deficit set out by the government at 3.3% of GDP in FY20 and bringing it down to 3% in future.

However, Indian economy has managed a higher fiscal deficit in the past with higher public investment in infra leading to a higher resource generation and growth of the economy. The enhancement of GFCF ratio needs to be planned from FY21 onwards. FDI in infra can supplement the domestic investible resources.

Further, the private consumption expenditure in FY20 has grown by 5.8% only against the growth of 8.1% in last year. This ratio is likely to improve further with likely growth in manufacturing and return of consumer confidence. The yearly growth in public expenditure of 10.5% (9.2% in FY19) also needs to be continued as it boosts up demand for steel and other commodities. 

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