GST: Issues of individual segment have adverse impact on steel demand
It is very much expected that this year’s Budget would provide a substantial budgetary provision for meeting the massive deficit in infrastructure in the country.
The infrastructure sector is exhibiting a rising trend. In FY19, the sector shows a 7.5% growth, against a rise of 5.6% in FY18.
It was achieved when Index of industrial production (IIP) grew a dismal 4.6% in last year. In the quarterly estimates, Construction GVA had achieved a highest growth of 9.7% in Q3 F19 and has been maintaining an average rate of 8.7% in all the quarters in FY19 against an average rate of 5.6% in FY18.
It is, therefore, not surprising that cement industry has reaped the maximum benefits of this premium sectoral performance. As new capacities in cement are surfacing, the production is showing a high growth (6.2% rise in FY19) reflecting a major hike in cement prices (`60/- per bag) which is unprecedented in the recent past. There is a virtual shortage in the cement availability for the bulk purchases by construction companies. As cement and steel are aligned each other in RCC structure and concrete foundations, the demand for steel from this segment is ensured. Reasonably stable growth in steel and cement output in FY19 have led to an improvement in steel-cement ratio to 0.328 in the last year and the trend is rising.
The real estate sector is gradually turning for the better. The primary reason is likely to be a 25 bps reduction in the credit rate for housing and personal goods purchases. The changes made in RERA are bearing fruits and supply-driven demand in the affordable housing scenario are prompting buyers to search for new houses in convenient locations.
As around 62% of steel consumption goes in for infrastructure and construction segment, the government expenditure in terms of public investment in the Railways, DFC, Metro, roads and urban infrastructure (along with private investment), airports, ports and shipbuilding would ensure that demand for steel from this segment would continue to grow. It is very much expected that this year’s Budget would provide a substantial budgetary provision for meeting the massive deficit in infrastructure in the country.
As the fiscal deficit is within the long-term prescription of 3.5% of GDP and the headline and core inflation rate has been managed below 4-5% band, the economic scenario in the country is quite appropriate to enhance the public investment in infrastructure. It would also significantly contribute to enhance the declining GDP growth by the multiplier impact of investment.
Among other components of steel consumption, the automobile sector accounting for nearly 10% of demand is under stress. The total automobile production has gone up by a meagre 6.26% in FY19, against 14.9% growth achieved in the previous year. Currently, sales are affected in case of passenger cars, commercial vehicles, two-wheelers and three-wheelers.
Although the drop in interest rate on personal loans would attract more buyers in automobile sector, the declining price trend is a dampener. Further the emergence of electric vehicles and introduction of BS-VI from next year would pose a challenge to the segment. Auto exports have dropped marginally in last year. The slow growth in demand from the sector would hamper steel demand in CRC and coated products, including demand for alloy steel.
Engineering and fabrication segment comprises around 22% of steel consumption in the country. This segment has been facing challenges. The capital goods (heavy machineries, excavators, pressure vessels) segment have grown 2.8% in FY19, against 4% growth in the previous year.
The output of consumer durable sector grew 5.3% in FY19 as opposed to 5.6% growth in FY18. The intermediate goods segment (drums and barrels, container) has dropped 0.6% in last year against 6.1% growth in the previous year.
The manufacturing sector as a whole has achieved a nominal growth of 3.5% in FY19, against 4.6% rise in the previous year. On the other hand, the exports of engineering goods (at $81bn in Fy19) have declined its share in total exports from 25.1% in FY18 to 24.5% in FY19.
The remaining 6% of steel consumption in other transport (rails, ships, aircrafts) and packaging (tin plates) is reasonably sound and will continue to be so in the next few years. Thus, around 32% of steel consumption (auto and engineering segments) is facing hurdles in the current year. It is certain that the sectoral issues affecting the growth pattern of individual segments have an adverse impact on steel demand, although some of the related issues have a commonality of solution. For instance, the flow of credit to the sector, the bank credit for working capital and capacity augmentation, the GST rate, the rising internal freight are all common and must be tackled jointly.
The demand contraction in the European Union, Japan, South Africa, Latin America and CIS countries have led to declining trend in global steel prices. The export price of Chinese HRC ex-Tianjin fob is currently at $495/t (landed at `42,500/-t cfr Mumbai) may be compared to the ruling domestic price of `40,800-410,00/t (excluding GST).
Source- Financial Express.
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