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Dark clouds on steel

Kunal Bose 

The fortunes of the steel industry are inextricably linked to how well or badly the economy behaves. It was a foregone conclusion that with the major economies contending with slowdown, steel makers around the globe would be showing poor results in the September quarter. In India in the last quarter, the index of industrial production fell from 3.8 per cent in July to 3.6 per cent in August to a distressing two-year low of 1.8 per cent in September. The country, therefore, was not taken by surprise that in the first half of this financial year, its finished steel consumption grew by an insignificant 1.8 per cent to 33.70 million tonnes (mt).

A fall in car sales here of 23.7 per cent in October, the steepest in 11 years, resulting from high interest rates and fuel prices, could not be music to steelmakers’ ears. Neither could inflation staying stubbornly high at 9.73 per cent last month, making people doubt the official forecast of it moderating soon. According to Tata Steel, the country’s most raw materials-secure unit, high interest rates resulting from sustained high inflation are leaving an impact on “steel demand in India in the near term.” While this is so, steel prices here have remained ‘stable’, with the company claiming ‘growth fundamentals firmly in place.’ This observation is to be judged against the lowering of this year’s growth rate from 8.2 per cent to anything between 7.7 and 7.5 per cent. The common wisdom is that in emerging economies in particular, steel consumption growth closely tracks progress of GDP and investment in infrastructure development. The experience of the Chinese steel industry till the world slumped into a recession in 2008 lends credence to such thinking.

The 9.4 per cent fall in the rupee vis-a-vis the dollar in the second quarter of 2011-12 worked to the advantage of local steel makers in that this proved a disincentive for imports. The Indian rupee happens to be the worst performer among major Asian currencies this year. As a result, making a break with the trend in recent periods, India’s steel imports in the first half on a year-on-year basis was down 1.63 mt to 2.86 mt, while exports in the same period were up 680,000 tonnes to 2.15 mt.

Tata Steel managing director Hemant Nerurkar says the fact that rupee exchange rate does not favour imports is coming to the aid of local producers to keep the metal prices ‘steady.’ In fact SAIL chairman Chandra Sekhar Verma said in an interview that after a nearly eight-month break, he could raise prices by Rs 1,000 a tonne in mid-October to offset increases in input costs. Striking a note of optimism for the current second half, Verma says October saw “good sales by SAIL and things should get better as we go forward.”

He is a brave heart. In justification of his optimism, Verma draws on empirical evidence projecting unfailing spurt in steel demand in year’s second half. If anything, this being the terminal year of the 11th plan, there should be an investment rush to complete plan projects, which in turn will create incremental demand for steel. From what the SAIL chairman is saying, steel consumption figures for October and November will give us a clear idea as to how close the country will be to eight per cent demand growth. Incidentally, there already is a 2 percentage point cut from the year-beginning demand forecast. The market does not, however, share any of the optimism voiced by steel mills and policymakers as share prices of Tata Steel, SAIL and JSW will bear it out. Nerurkar says “We have to see what happens to steel prices in the next quarter” in the context of recent spot price falls of iron ore and metallurgical coal.

Meantime, the Chinese steel scene remains worrisome. Not only did Chinese October daily crude production hit its lowest at 1.786 mt in 10 months, but Bao Steel, the industry’s biggest, is to cut December prices of its principal products, underscoring weak demand. In fact, as sluggish metal demand is leading mills in Europe in particular but also in China to hold off purchases of raw materials, iron ore and coal have beaten a retreat in the spot market. Some mills there have preponed shutdown for maintenance, in order not to see their steel inventories rising and putting further pressure on prices. World steel capacity utilisation remains below 80 per cent.

While this is so, the seventh straight monthly fall in the Organisation for Economic Cooperation & Development’s composite leading indicators (CLIs) of economic activity in its 34 member- countries to 100.4 in September is a cause of concern for steelmakers. OECD says September CLIs are a further reinforcement of its earlier assessment that “slowdown in all major economies” is to continue and in most of these places, economic activity will be below the long-term trend. We should not miss the point that CLIs for India fell further below 100. No consolation that China is keeping us company.

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First Published: Tue, November 22 2011. 00:59 IST