Bleak prognosis for minerals and metals

A message that has come loud and clear to producers of minerals and metals from Finance Minister Arun Jaitley is that global challenges could become stronger in the coming days. After the world economic growth slid to 3.1 per cent in 2015 from 3.4 per cent in the previous year, economists have started fearing the onset of a global recession. This happens when global growth sinks below two per cent. What is particularly unnerving is that quite a few developed economies, including the US, European Union (EU) and Japan, are prone to be stuck in deflation.

Jaitley has given hints in the Budget of the "risks of further global slowdown and turbulences." The point not to be missed is that last year, world trade volumes grew by only two per cent, lower by more than a percentage point of GDP growth. The Economist writes: "Before the financial crisis, global trade used to grow faster than GDP; now it is lagging behind." This does not bode well for our engineering exports, which constitute 23 per cent of the country's total exports. An important consumption point for steel and non-ferrous metals, engineering products originating in India will have trying times in their two principal markets of the US and EU.

While manufacturing activity in EU expanded at its weakest pace for a year in February, manufacturing purchasing managers' index (PMI) for the US has remained below 50 that separates growth from contraction since October. In better times, China invested heavily in rapid build-up of capacity of the whole range of metals from steel to aluminium to copper. Now that the country is managing to grow at below seven per cent in the wake of migration from investment-led to consumption-led growth, it has the burden of surplus of metals, particularly steel and aluminium. The country's official PMI stood at 49 in February. Caixin/Markit China PMI, where the focus is on small and mid-sized companies, is not faring any better either. In the circumstances, China remains under compulsion to sell metals of which it has surplus in the world market at subsidised rates. This is, however, much to the annoyance of countries, including India, which host major steel and aluminium capacities. Precisely because of hidden and not-so-hidden subsidies, steel exporters in China are subject to growing trade action in the US, the EU and India.

In the first 10 months of 2015-16, India's steel imports were up a disturbingly high 24.1 per cent to 9.306 million tonnes (mt) when exports took a hit of 32.5 per cent to 3.156 mt. No wonder that during this period, the country's steel production for sale was down 1.8 per cent to 75.66 mt. The saving grace is steel consumption here grew by 4.2 per cent to 65.919 mt. The Joint Plant Committee of steel ministry points out "such growth (consumption) was mostly led by imports" as decline in saleable steel production here would bear out. No doubt, global environment for steel and other metals will continue to remain 'unsupportive' requiring of the government to build 'firewalls'. Ahead of the Budget, the steel industry got relief by way of minimum import prices ranging from $341 to $752 a tonne on 173 of 343 principal steel products. The Budget has raised the import duty on primary aluminium to 7.5 per cent from five per cent and on aluminium products to 10 per cent from 7.5 per cent. The hike became unavoidable since imports now have a share of 56 per cent in India's use of aluminium. Though government dispensation falls short of what the industry wanted, Aluminium Association of India chairman T K Chand says revised duties will help in "checking influx of cheap imports".

Referring to the Budget focus on infrastructure development embracing highways and road building, construction of new ports and revival of 'under-served' airports, a spokesperson for Steel Authority of India says this will be a booster for steel demand. Incidentally, infrastructure alone accounts for half the country's steel consumption. Chand is particularly welcoming of the move to provide liquified petroleum gas (LPG) connections to 15 million below poverty line (BPL) households in 2016-17. In the next two years, 50 million BPL households are to get this benefit. As this will spare the poor women from the curse of chullah smoke, the demand for LPG grade steel will get a major uplift. Per-capita rural demand for steel is stuck at a low 12.11 kg. But, rural India will demand so much more steel if farmer income is doubled by 2022.

TOUGH DAYS AHEAD

• Economists warn of an impending global recession
   
• The US, the EU and Japan prone to witness deflation
   
• This does not bode well for engineering exports, which constitute 23% of India's total exports
   
• Engineering products originating in India will have trying times in their two principal markets - the US and the EU