Steel Price Rise not Sustainable Without Growth in Demand

15 March 2016

The disconnect between physical volume and gross value added became more apparent with the release of IIP data. Industrial output in January is down by 1.5% compared to same month last year which pulls down the cumulative growth in industrial production during April to January period to only 2.7%. That manufacturing is still reeling under shrinking order position reflected in a negative 2.8% growth in the sector during the month.

The steel-intensive capital goods sector continues to display a fluctuating trend by showing a massive negative fall of more than 20% in the month. Among the other sub-segments under manufacturing, furniture and fabricated metals have performed reasonably better than electrical machinery and component that went down by more than 50%. The manufacturing of motor vehicles has grown by 3.7%, while other transport equipment were almost at the same level as last year.

The below normal industrial growth at the beginning of the current year must reflect on the performance of some of the prominent components of industrial production in the next month. Official data shows that steel consumption in the country in the first 11 months of the current fiscal has grown by 4.3% and the most part of this must be accounted for by poor growth in all the above segments. The big question therefore centres on the ability of the construction sector to pull up the steel industry despite a lackluster performance in manufacturing. This is yet to happen.

It is also to be appreciated that the emergence of high strength steel in construction and fabrication is leading to lower volume weight due to application of high strength steel (more than 350 MPa) which provides  faster construction, high strength to weight ratio, lower dead weight and hence lower foundation cost. High strength steel leads to lower welding, fabrication and transportation costs. All these advantages of using better quality steel would convert into lower volume of output, be it in basic metal sector or in fabricated metals. And therefore innovative methods of construction leading to lower weight of the materials and also lower construction cost by considering all aspects of cost reduction would signify slower growth in output.

This is an issue that would be more glaring in the coming months when various higher strength value added steel including cold formed structural, tubular and hollow structural and high strength plates would be preferred more and more by the end users. The domestic steel producers completing their brownfield expansions would be left with little alternative but to produce these special grades and dimensions by installing state-of-the-art process technologies and innovations to cater to these requirements.

The performance of the industry is therefore better captured by the increase in turnover and Ebitda margin and not always by a higher volume. This would also require a paradigm shift in our approach to evaluate the performance of the industry. It is heartening to note that after the series of import restrictive measures, the industry is able to achieve a higher realisation for their products with control on flow of imports. More significantly the global prices that nosedived only a month back are rising at a fast rate. Chinese HR Coils that was available to the importers at a fob price of $260/t and CFR rate of $280-285/t (Mumbai) in mid-January has currently moved up to $332/t fob and rising.

It was impossible to match Chinese export price of HRC (fob) that was nearly $80/t lower than the marginal cost of the product and China faced antidumping and countervailing investigations from almost all importing countries. The current prices would enable Chinese producers to recover some losses and repay loans. The sympathetic rise in global steel prices in HRC, Rebar, Billets and Plates would benefit all exporting countries and bring down the vicious circle of trade protective measures. However, it is really not known if the price rise is synonymous with rise in demand.

The steep rise in iron ore prices (from $35/t CFR China for 62% Fe to $63/t in March) appears to be speculative and must come down in the coming days at least by $15-20/t as there is no appreciable increase in demand for the material and high inventories are lying at Chinese ports. Overall the situation is volatile and needs to be closely monitored.

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


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