I. INTRODUCTION
Steel being a key input to the country’s infrastructure sector, plays a major role in the growth of a developing economy. The sector contributes nearly 2 per cent to India’s Gross Domestic Product (GDP). India became the third largest producer of crude steel, behind China and Japan. The country is also the third largest consumer of finished steel after China and USA. The demand for steel is mainly driven by construction, infrastructure and automobile sectors, accounting for over 75 per cent of the total steel consumed in the country.
The steel sector in India, during 2010-11 to 2014-15, experienced an increase in the production and consumption of finished steel at a CAGR of 7.2% and 3.6% respectively indicating a lack of demand. However, the imports have risen rapidly due to surge in cheap exports by China, Russia, Korea, and Japan etc. and various other factors such as global overcapacity, demand deficiency of steel, declining competitiveness of Indian steel manufacturers, sporadic supply of raw materials, etc.
In order to protect the domestic steel industry, the government has taken various steps such as imposition of 20 per cent safeguard duty in March 2016 on hot-rolled flat products, imposed anti-dumping duty for five years on imports of variety of steel products from China, Korea and Malaysia.
A series of tariff barriers along with the new National Steel Policy (NSP), 2017 is expected to bring stimulus to the steel sector.
II. ECONOMIC ANALYSIS
II (A) Global Economy
According to International Monetary Fund (IMF), the global economy grew by 3.8% in CY2017, a 0.6 per cent increase over CY16 owing to an increase in manufacturing activity, private consumption, investments and global trade. IMF projects the global economic growth to be robust during 2018.
The advance economies performed better than expected with a stronger gross fixed capital formation and acceleration in stock building, with accommodative monetary policy, stronger balance sheets, and an improved outlook helping release pent-up demand for capital goods. On the other hand, emerging economies saw an upswing in growth led by private consumption. In countries like India and China, growth was led by robust growth in net exports and strong private consumption, respectively although investment growth has slowed during the year.
Other global development includes
a) Oil witnessed a sharp increase from the levels of $54 per barrel in 2017 to $72.8 per barrel in 2018, driven by production cuts administered by OPEC.
b) US monetary measures- US Dollar appreciated on the back of rising Federal Reserve rates from 1.5-1.75% to 2-2.25% in December 2018.
Challenges
a) Rising oil prices
b) Increasing protectionism, rising trade barriers
c) Geopolitical risks
d) Escalating global debt and rising interest rates
Outlook
Global growth outlook for 2018 remains positive despite some recent softness. However, spillover risk from advanced financial markets to emerging markets has increased. Tightening of liquidity conditions in the developed markets alongside expansionary US fiscal policy and a strong US dollar have started to adversely impact emerging market currencies, bonds and capital flows. Firming commodity prices and geopolitical developments
pose added risks.
II (B) Indian Economy
India’s GDP growth at 7.7 per cent in Q4: 2017-18 shows that the Indian economy is on the recovery track on the back of a sharp pick-up in gross fixed capital formation and uptick in capacity utilisation. However, GDP growth slowed in Q2’18 due to moderation in private consumption and net exports.
In FY 2017-18, India’s fiscal deficit was 3.5% of GDP. The government has targeted to reduce this to 3.3% in 2019. It reached 94.7% of government’s annual target during the April-August period while revenue deficit crossed the budget estimate at 113.8% in the same period. India’s CAD in FY 2017-18 grew to 1.9% of GDP. It widened to 2.9 percent of GDP in July-September 2018-19.
The Index of Industrial Production (IIP) growth in November 2018 is estimated to be 8.1% YoY. Consumer Price Index averaged to 3.6% in FY 2017-18 and eased to a low of 2.33% in November 2018 as compared to 3.31% in October.
Outlook
Economic growth will slow somewhat but remain robust, at close to 7.5 per cent in 2019 and 2020. Higher oil prices and the rupee depreciation are putting pressure on demand, inflation, the current account and public finances. However, business investment and exports will be strong, as past structural reforms – including the new Insolvency and Bankruptcy Code, smoother implementation of the Goods and Services Tax (GST), better
roads and electricity and bank recapitalization – are paying off.
III. INDUSTRY ANALYSIS
III (A) Global Steel Industry
1. Production and Consumption:
With improved steel consumption in China and investment led recovery in advanced economies, global steel consumption saw an improvement in 2017 which grew 4.7% to 1.59 billion tonnes in the year. The government’s stimulus measures and momentum in construction activities fueled steel demand in China.
Global crude steel production grew by 5.3% or 63 million tonnes in 2017 to 1691.2 million tonnes, as most economies registered good growth in steel production.
2. Capacity
The latest available data suggest that global steelmaking capacity has decreased for 2017 to 2251.2 million tonnes. However this modest adjustment (-1.3%) still isn’t enough to alleviate global excess capacity. Moreover, a number of new investment projects continue to take place around the world and global steelmaking capacity could increase by +2.3% between 2018 and 2020 in the absence of any further closures. Global excess capacity is expected to continue to be a major challenge for the global steel industry.
3. Key Challenges
Short term challenges:
• Possible escalation of trade tensions
• Rising inflationary pressure and tightening of US and EU monetary policies which may cause financial market volatilities and trouble in highly indebted emerging economies
• US imposing hefty duties on steel, aimed at dissuading China from exporting its excess metal onto US markets.
Long term challenges:
• Different economies imposing a restriction on global free trade policies
• The biggest consumer and producer, China, faces risks to its economic growth led by increasing Government restrictions and debt
• Demographic and technological changes like digitalization, de-industrialization and an ageing population
4. Outlook
World Steel Association projects global steel demand will reach 1,657.9 Mt in 2018, an increase of 3.9% over 2017. In 2019, it is forecasted that global steel demand will grow by 1.4% to reach 1,681.2 Mt. Global steel demand faces uncertainty from tensions in the global economic environment. Rising trade tensions and volatile currency movements are increasing uncertainty. Normalization of monetary policies in the US and EU could also influence the currencies of emerging economies. China steel demand growth is expected to decelerate in the absence of stimulus
measures. Both downside and upside risks exist for China. Downside risks come from the ongoing trade friction with the US and a decelerating global economy. However, if the Chinese government decides to use stimulus measures to contain the potential slowdown of the Chinese economy in the face of a deteriorating economic environment, steel demand in 2019 will be boosted.
Sanchita Bhatia
MBA-FA(2018-20)