Smart Re­cov­ery:

As the world steel out­look turns pos­i­tive, In­dia of­fers a glim­mer of hope with in­creas­ing de­mand for the vi­tal build­ing ma­te­rial.

India Business Journal - - CONTENTS - ALIREZA MOGHADAM

As the world steel out­look turns pos­i­tive, In­dia of­fers a glim­mer of hope with in­creas­ing de­mand.

There is some good news for steel pro­duc­ers around the world. Af­ter years of wait, char­ac­terised by slow­ing de­mand, ex­cess ca­pac­ity and large in­ven­tory, fac­ing head­winds that slowed con­sump­tion in re­cent years, de­mand growth in world steel is be­gin­ning to face a cycli­cal up­turn. Con­sump­tion de­mand is ex­pected to pick up on the back of the mo­men­tum in global eco­nomic growth. Based on the de­mand con­di­tions, the World Steel As­so­ci­a­tion (WSA), in its short-range out­look, has fore­cast that global steel de­mand will improve to 1,648 mil­lion tonnes (mt) in 2018 from an es­ti­mated 1,622 mt in 2017.

In 2017, the risk of global re­ces- sion re­ced­ing and eco­nomic per­for­mance im­prov­ing across most re­gions, along with sev­eral geopo­lit­i­cal changes still cre­ated some con­cern. US pol­icy un­cer­tain­ties, Brexit, the ris­ing pop­ulist wave in cur­rent Euro­pean elec­tions and the po­ten­tial re­treat from glob­al­i­sa­tion and free trade un­der the pres­sure of ris­ing na­tion­al­ism add a new di­men­sion of un­cer­tainty in investment en­vi­ron­ments. To bal­ance this, risks from on­go­ing con­flicts in the Mid­dle East and in East­ern Ukraine ap­peared to be reducing.

In other words, the in­dus­try has, by and large, been able to ride out this year's po­lit­i­cal risks, in­clud­ing the Fed rate hikes, Euro­pean elec­tions, ris­ing crude oil prices and Trump-in­duced mar­ket volatil­ity. Ad­mit­tedly, China is the mover and shaker of the world steel mar­ket by be­ing the largest pro­ducer and con­sumer of the vi­tal in­dus­trial ma­te­rial. De­mand for fin­ished steel is vari­able around the world, but, for the most part, it is fore­cast to in­crease this year in most re­gions.

De­mand uptick

China ac­counts for about 45 per cent of world steel de­mand. Its steel de­mand in 2017 is es­ti­mated to grow by 3 per cent. Ex­clud­ing China, steel de­mand is ex­pected to ex­pand by 2.6 per cent to reach 856 mt in 2017 and by 3 per cent in 2018 to 882 mt.

The pos­i­tive cor­re­la­tion be­tween global eco­nomic growth and steel con­sump­tion is well recog­nised. From less than 3 per cent in 2016, there has been a mod­est pick-up in global growth to 3.3 per cent last year and a fur­ther in­crease to 3.6 per cent in 2018 is es­ti­mated. For the world mar­ket, at present, risk fac­tors in­clude geopo­lit­i­cal ten­sion (fric­tion be­tween the US and North Korea), pro­tec­tion­ist ten­den­cies and China's debt prob­lem.

The Chi­nese steel in­dus­try has been fac­ing en­vi­ron­ment-re­lated is­sues as well as trade fric­tion. The big ques­tion ev­ery­one is ask­ing: Who will re­place China as the world's growth en­gine for con­sump­tion? Over the last two decades, China recorded phe­nom­e­nal growth in steel pro­duc­tion and con­sump­tion. The Asian ma­jor's growth has been driven by in­vest­ments, led by heavy in­vest­ments in the con­struc­tion sec­tor, in­clud­ing in­fra­struc­ture, hous­ing and com­mer­cial seg­ments.

The EU re­cov­ery is so­lid­i­fy­ing with many pos­i­tive de­vel­op­ments. Eu­ro­zone mon­e­tary pol­icy is ex­pected to re­main on its cur­rent path, while fis­cal tight­en­ing is not ex­pected to strengthen fur­ther, and risk of dis­in­fla­tion has sig­nif­i­cantly re­ceded. If po­lit­i­cal sta­bil­ity can be main­tained, investment is ex­pected to pick up to pro­vide a fur­ther boost to the re­cov­ery. Ben­e­fit­ing from the im­prov­ing global econ­omy and weak yen, Ja­pan's

steel de­mand is ex­pected to show a sta­ble re­cov­ery. Ac­cord­ing to the WSA Re­port, steel de­mand in the de­vel­oped economies will in­crease by 1.2 per cent in 2018.

Hav­ing dealt with the struc­tural prob­lems and fall in com­mod­ity prices, the Rus­sian and Brazil­ian economies are sta­bil­is­ing and ex­pected to show mod­est growth in 2017. Rus­sian growth will con­tinue to pick up in 2018 as struc­tural re­forms take more ef­fect.

The In­dia fac­tor

Af­ter the de­mon­eti­sa­tion shock, the In­dian econ­omy is ex­pected to re­sume growth, al­though on a slightly weak­ened ba­sis. The ASEAN coun­tries are ex­pected to demon­strate solid growth in 2017-18. How­ever, the re­gion re­mains vul­ner­a­ble to cur­rency volatil­i­ties as­so­ci­ated with US in­ter­est rate hikes and dol­lar ap­pre­ci­a­tion.

Ac­cord­ing to the WSA Re­port 2017, steel de­mand in the emerg­ing and devel­op­ing economies, ex­clud­ing China, which ac­counts for 30 per cent of world to­tal, is ex­pected to grow by 4.9 per cent in 2018.

In­dia was the world's third-largest steel pro­ducer in 2016. The growth in the In­dian steel sec­tor has been driven by do­mes­tic avail­abil­ity of raw ma­te­ri­als, such as iron ore and cost­ef­fec­tive labour. Con­se­quently, the steel sec­tor has been a ma­jor con­trib­u­tor to In­dia's man­u­fac­tur­ing out­put. The In­dian steel in­dus­try is very mod­ern with state-of-the-art steel mills. It has al­ways strived for con­tin­u­ous mod­erni­sa­tion and up­grade of older plants and higher en­ergy ef­fi­ciency lev­els.

The In­dian steel in­dus­try will be dom­i­nated by flat steel prod­ucts due to the rise in con­sump­tion of au­to­mo­tive, con­struc­tion, in­fra­struc­ture and trans­port, do­mes­tic ap­pli­ances and other in­dus­trial ap­pli­ca­tions (of­fice furniture, heat­ing, ven­ti­lat­ing, air con­di­tion­ing, and pack­ag­ing). It is es­ti­mated that the con­sump­tion of steel as a sus­tain­able ma­te­rial will con­tinue to grow dur­ing the fore­cast pe­riod as tech­no­log­i­cal pro­gres­sions and extensive R&D will de­crease the con­sump­tion of en­ergy in the steel pro­duc­tion process. The In­dian steel in­dus­try is im­pacted by hin­drances in iron ore sup­ply, sta­ble do­mes­tic iron ore prices, un­com­pet­i­tive steel ex­port be­cause of sta­ble In­dian ru­pee and dump­ing of steel on In­dia by steel­sur­plus na­tions, such as China.

In­dia is ex­pected to over­take Ja­pan to be­come the world's sec­ond­largest steel pro­ducer soon and aims to achieve 300 mt of an­nual steel pro­duc­tion by 2025-30 based on in­creased ca­pac­ity addition in an­tic­i­pa­tion of up­com­ing de­mand and the new steel pol­icy of the gov­ern­ment. This is ex­pected to boost In­dia's steel pro­duc­tion. A huge scope for growth is of­fered by In­dia's com­par­a­tively low per capita steel con­sump­tion and the ex­pected rise in con­sump­tion. As the world steel out­look turns pos­i­tive, In­dia of­fers a glim­mer of hope with in­creas­ing de­mand for the vi­tal build­ing ma­te­rial. (The au­thor is chair­man of the AMIDT Group, a di­ver­si­fied con­glom­er­ate with in­ter­ests in met­als, min­ing and com­mod­ity trad­ing, among others.)

Global steel de­mand is set to improve to 1,648 mt in 2018 from an es­ti­mated 1,622 mt in 2017.

Thriv­ing au­to­mo­bile and in­fra­struc­ture sec­tors are driv­ing de­mand for steel in In­dia.

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