There is a series of forecasts on the business outlook in the first month of the new financial year. While the global market is projected to experience a subdued growth (IMF predicts a lower than 3.4% global GDP growth in 2016 compared to 3.1% in 2015), the forecasts for global trade have been revised downwards (WTO measures 2.8% growth in global movement of goods and services in 2016). The PMI movement is on predictable lines. The global PMI at 50.5 in March is branded subdued and while the indices are largely falling in majority of countries (negative in Japan, Russia, South Korea, lackluster in the US, EU, China and Brazil), they are a good positive for India. The country is projected to have a strong GDP growth of 7.5% in 2016, the highest among the emerging and advanced countries and this is to be made a reality by a reasonably high investment in roads, railways and other infrastructure sectors.

Although some genuine concern is expressed for an uncertain monsoon that may disrupt the smooth upward movement of the economy and falling trend in exports, the inflation continues to remain within a manageable level (5.5%-6%) and this has prompted RBI to cut down the repo rate by 25 basis points. To what extent it would lead to bringing down the cost of capital, depends on a multitude of factors like the ability of the banks to reformulate the NPAs, restructuring of the outstanding loans by the defaulters and actual demand for credit and growth momentum in manufacturing. The latter one being primarily dependent on the market outlook, the forecasts of the business in the coming quarters assume a critical dimension.

Industrial growth in the first 10 months has reached 2.7% with manufacturing languishing at 2.5%. In order to achieve a respectable growth of minimum 4% in FY16, IIP and manufacturing need to grow at a much higher rate in the last two months. However, keeping in view the current discrepancy between GVA and physical output, the higher growth in GVA for industry as well as manufacturing to the level of 8.3% and 9.5% in FY16 compared to 4.9% and 5.5% in FY15 would have a positive impact on the business outlook with conditionality. Also the March PMI at 52.4 for India instills a higher aspiration for a better business scenario.

For the steel sector, the increasing trend in iron ore ($54/t CFR China for 62% Fe) and marginally upward push to coking coal ($82/t FOB Australia for hard coking coal) and Brent crude oil prices ($42/t) and the current hike in global prices of HRC, CRC, Plates, Coated sheets, Rebars strongly imply that the phase of low prices of raw materials and steel are over. Despite predictions of a steep decline in economic growth leading to curbing of demand and exports, Chinese steel prices are exhibiting rise and not by an insignificant level. HRC is currently exported by China at $372/t fob port (with lower prices of CIS origin) which is around $50/t more than the marginal cost and almost recovers the operating cost.

As Chinese HRC is facing abundant trade restrictions to gain access to many countries, the rise in prices would eliminate further anticipated trade curbs for China in the remaining markets. The resultant increase in Ebitda in steel is likely to be sustainable in the next few months. This would primarily imply that domestic market growth would be fully exploited by the producers.

India’s steel consumption at 80.3 MT is projected to grow to 85.5 MT (@ 6.5% in the minimum) in FY17. Thanks to the government support for Indian steel industry, the import flow in FY17 is likely to be substantially lower compared to record flow of 11.2 MT of finished steel in the last year. Barring essential imports in CR, CRGO, Tin Plate, Pipes, Plates, special Bars including in alloy/stainless steel and those under Advanced Licences totaling around 4.5 MT, the other imports of around 7 MT (2015-16 level) would be available to the domestic producers.

Thus the domestic market size available to the steel producers would be equivalent to 81 MT. This volume along with projected finished steel exports of 4.2 MT (a 10% growth over last year’s diminished tonnage) makes the total finished steel market for FY17 at 85 MT. Overall, the crude steel volume required to produce the total finished steel projected in the current year amounts to 94.5 MT which would be a 5.8% growth over CS production in last year at 89.3 MT and this is quite a likelihood under the current circumstances.

The author is DG, Institute of Steel Growth and Development. Views expressed are personal.

 

Source : financialexpress.com

Report Abuse