Current growth cycle in steel sector to last for 24 months: Sushim Banerjee

30-Oct-2018

We recall that the market scenario in Q1 of FY18 was dull. Prices were down; capacity utilisation was poor, expansion plans were put on hold and PMI exhibited bleak forecasts of new order booking and were on the brink of contractionary mode.

We recall that the market scenario in Q1 of FY18 was dull. Prices were down; capacity utilisation was poor, expansion plans were put on hold and PMI exhibited bleak forecasts of new order booking and were on the brink of contractionary mode. In the next 3-4 months’ time, the scenario got reversed.

While raw materials were no longer moving sharply southward, finished product prices commenced upward journey on the back of sudden investment push and gradually rising industrial production despite the temporary complexities of GST implementation. GDP dropped down to 5.6% in Q1, marginally rose to 6.3% in the second quarter, subsequently jumped to 7.0% in Q3 before ending the year with 7.7% growth in Q4.

The economy clocked a record 8.2% rise in Q1 of FY19 and may achieve a growth of 7.5% in Q2 of the current fiscal. As this analysis briefly sums up the background of growth of steel industry, it has become increasingly apparent that the scenario is highly dependent on a corresponding health of global economy and the behaviour of China, still the market leader in production and consumption. The Global economy rose by 3.7% in 2017 and is projected to grow by the same rate in the current CY.

The impact on steel prices was directly linked with growth momentum in the economy. HRC export price went up from $ 450/t fob Tianjin in June’17 to $ 548/t in October’18 with both global Iron Ore prices ($ 57.15 /t cfr China in June’17 to $ 71.5/t in October’18) and Metallurgical coal prices ( from $ 146.5/t fob Australia in June’17 to $ 214.5/t in October’18) exhibiting the rising trend.

Three constraints raised their head in this otherwise growth oriented scenario. One, the secular rise in Crude oil prices that put severe strains on India’s CAD and threatens to bring in additional financial pressures (with lower exports) due to the ensuing US sanction on Iran that may further jeopardise India’s trade balance.

Second factor was US imposition of additional 25% duty on steel and 10% on Aluminium across all trading partners. It was followed by actual imposition of additional 10% duty on nearly $200 bn worth of Chinese exports to USA which was promptly retaliated by China by imposing additional duties on US exports to China. Some minor reliefs have since been announced by USA with respect to NAFTA partners, Brazil, South Korea and Turkey, but stiff rules of Protectionism are currently ruling the global steel trade entering into other areas like Agriculture and Service sectors.

Global trade volume has grown by 2.4% in 2017 and is projected to go down to 2.1% in 2018. Third, China has cut down its capacity in various commodities due to overheating of the economy and closed capacities contributing to environmental pollution and has reoriented its focus from investment to consumption. It has clocked 6.9% GDP growth in 2017 marginally up from 6.7% achieved in 2016 and is projected to rise by 6.6% in the current year.

It is now predicted by some analysts that the party is coming to an end by Q2 of 2019 by which time the global HRC is to reach an average $688 fob export port from the current $560 fob/t, a rise of $128/t in the next 7 months. This implies that the current growth cycle in steel is to last for 24 months only (Q2 of 2017 to Q2 of 2019). How strongly the above factors would accelerate the fall? Let us look at China factor first. Chinese economy is still experiencing a gain in fixed asset investment especially in Infrastructure.

Recently, People’s Bank of China announced plans for a $175 bn stimulus to promote lending. The country is experiencing a housing boom; however peak housing prices may go in for a decline. It has procured 803.3 MT of imported Iron Ore in the first 9 months of the current year. Its steel exports during the period have come down to 53.1 MT, a fall of 10.7% compared to last year.

Domestic price of Chinese HRC ($ 612 /t ex-works (incld.VAT) in October’18) is ruling at $ 64/t more than the export price despite depreciation of RMB by 6-8% in recent months. In fact the currency depreciation in China, Argentina, Turkey, Brazil, Vietnam, Indonesia and India as a fallout of rising US interest rate to 2.25% from 1.5/2.0% a few months’ earlier and rise in domestic inflation does not appear to be a strong factor that would derail these economies in 2019.

Chinese production of Crude steel had reached 831.7 MT in 2017 and is projected to grow by 5-6% in 2018. The capacity closures in China more on account of pollution regulation have enabled it to eliminate inefficient capacities that were a drag on the finances of banks and other FIs. The consumption of steel in China at 736.8 MT in 2017 is slated to reach 781MT in 2018 (including unreported steel by IF sector in 2017). However, a nil growth is envisaged in Chinese steel consumption in 2019 by WSA which may not come true.

As long as domestic demand is rising ( 6.0% rise in 2018 and 7.6% in 2019), lower steel exports by India due to protected export markets of US/EU can be managed. The challenge is to make provision for more investment to make up infrastructure deficit, an accelerated push to Housing activities and maximising manufacturing production which all can only maintain stable and consistent growth of Indian steel industry.

Source: FINANCIAL EXPRESS