Steel use spurt to lag GDP growth 1st time after FY09

Demand sluggish globally but ‘policy paralysis’ worsens situation in India.

The historical relationship between gross domestic product (GDP) and steel use growth in India indicates the latter has always been ahead, except during the slowdown in 2008-09. With its sluggish growth, steel consumption will once again lag behind the GDP growth rate.

Cumulative figures till October show 2.9 per cent growth in steel consumption, according to Joint Plant Committee data. “Till November, the growth is 3.9 per cent to 44.21 million tonnes. For the next quarter, if the steel consumption growth rate increases to eight-nine per cent then the annual growth would probably be five-six per cent,” said Jayant Acharya, director-commercial, JSW Steel.

But, that would still be below the GDP growth projection for 2011. The government recently lowered its GDP forecast for the current fiscal from nine per cent to 7.5 per cent, but it would still be way ahead of steel consumption growth, going by steel industry expectations.

In 2008-09 too, the growth in consumption at less than a per cent had lagged behind the GDP growth rate.

Joint Plant Committee officials, however, pointed out the CAGR (compounded annual growth rate) was 10 per cent in the past five years, as in the subsequent years the growth was well above 10 per cent and had even increased to the 13 per cent levels. Till October, the real consumption was 39.58 million tonnes.

“The problem is both investment and consumption expenditure are down. Investment expenditure as a percentage of GDP is normally 32 per cent. It has dropped to 28 per cent,” Acharya explained.

The demand is sluggish all over the world, but it’s the “policy paralysis” in India that has added to the industry’s woes. “No major infrastructure project has been sanctioned by the government in the past six months,” said a Mumbai-based downstream steel player.

For the 11th Five Year Plan (2007-08 to 2011-12), the government had planned to spend about Rs 20.56 lakh crore. For the first four years, however, the government has been able to spend 50 per cent of the Plan funds in 2007-08, 49 per cent in 2008-09 and 38 per cent in 2011-11.

Roads and bridges was the only performing sector, where most of the planned funds were spent, while the railways and ports were the major laggards. Spending in power has also come down since the beginning of the Plan period.

The problem is not just with the Central government and projects. It’s at the state level as well.

“Real estate projects in the private sector are stuck for want of approval from state governments. Graft charges are taking a toll on decision-making,” a producer pointed out.

The capacity utilisation is at 75-80 per cent, largely due to the clampdown on iron ore, which some say is probably a blessing in disguise. “With the iron ore ban, supply is now limited. Or else, there would be a freefall in prices,” said a primary steel producer.

Globally, prices have come down from $780 a tonne in April to $620 a tonne now. In between, the industry has had to absorb peak raw material prices, resulting in margin pressure.

Raw material prices have corrected since, and the trend is likely to continue. “India is globally linked and the difference with domestic prices is about $30 a tonne,” said a producer.