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Steel industry: Capital formation better indicator of growth

 A comparison of per capita steel consumption among the different countries of the world and the low level of it that India could reach after 72 years of independence and after 113 years of setting up a steel plant in the country is always mentioned as the big potential area that should drive growth in steel industry in the next decade. Looking at from a different angle, the denominator of the ratio is determined by factors and considerations that have nothing to do with steel consumption. A regimented drive to arrest population (POP) growth leads to up ticking the ratio without any conscious attempt to push up steel consumption, but works favourably to move up the per capita consumption (PCC).

The numerator is the derived output of all the efforts put in by the end users of steel and the suppliers of steel (including import sources) to match the demand. Sparsely populated countries with total steel consumption at less than 70 million tonne, like Russia (PCC: 285.9 kg, POP: 144Mn), Canada (PCC : 469 kg, POP: 36.8Mn), Germany (PCC: 496.5 kg, POP: 82Mn), Japan (PCC: 514.1 kg, POP: 127.2Mn) are high on the ladder benefitted by a low population base, while USA (PCC: 306.5 kg, POP: 327Mn), China (POP: 141.5 crore, PCC : 590.1kg) and India (POP: 135.4 crore, POC: 70.9kg) denote wide variations in the result. By restricting growth of population lower than growth in steel consumption, these countries can opt for higher PCC, but that may not suit some other policy perspectives. Economic realities, however, are making some of the developing countries aware of the risks of higher population and the huge social issues it raises for the government to face and resolve. The most important aspect of this ratio is established by the fact that it focuses all attention to raise total steel consumption in the country directly and by all the stakeholders.

steel structure

Steel industry: Capital formation better indicator of growth

In search of an alternate measure of steel consumption in the country, the experts (World Steel Dynamics) have drawn our attention to Gross Domestic Capital Formation as a percentage of GDP measured by Fixed Asset Investment. This appears to be a better measure as both the numerator (GFCF) and the denominator (GDP) contributes directly or indirectly to steel consumption. Basically the significance of this ratio in determining the scope and measurement of steel consumption in the country is enormous. It is well established that fixed capital investment and spending by the government and households would drive steel consumption. There are some aspects of the fixed capital investment ratio that need to be addressed.

First, a comparison of GFCF as a percentage of GDP would place India way behind China. In China this ratio is around 44% of GDP against India’s 32.3% (at constant prices) and 29.3% (at current prices). This percentage has to move up quite substantially to spruce up steel demand. A number of countries which are passing through a phase of subdued market demand, low employment rate, slow export growth, stressed liquidity are adopting stimulus measures to boost up the domestic demand. Most of the infrastructure sectors have externalities and therefore these areas need public investment as a driving factor to attract private capital inflows in PPP projects which, however, still need to reduce the perceived risk elements. For a developing economy, the rise in GFCF has the ability to reverse the declining trend provided some other reforms in areas like labour, MSME sector, restructuring of banks and NBFCs to ease the liquidity flows for business operations, changes in school and college curricula, creation of vocational skills to address unemployment issues, among others, are undertaken on an urgent basis. The goal is to improve the business environment so as to make private entrepreneurial endeavours a reality. Thus, rise in GFCF ratio is necessarily be accompanied by initiation of reforms to induce private corporate sector to display their animal spirit by enlarging and supporting public investment in infrastructure.

The GFCF accounts for total investment in the economy comprising of agriculture, industry and service sectors. As investment in primary and tertiary sectors is not steel intensive, the industrial investment can be taken as primarily indicative of steel consumption driver. The share of industry in total investment in India has been steadily declining from 38% in FY13 to around 33% in FY18. A nominal percentage of other two sectors can also be considered to assess the total impact on steel consumption.

Another important factor is steel intensity of investment. Here China scores much higher as steel-intensive structures are preferred over that of competing materials, be it in building and construction, infrastructure (roads, railways, ports, telecom, irrigation and shipbuilding), automobile and other engineering goods including packaging. Steel intensive structures are chosen due to long term cost advantage (life cycle cost analysis), durability and flexibility to support modification and replacement and above all for environmental friendliness of steel.

A rough estimate by WSD has shown that $1 trillion FAI can create steel consumption of 180 MT in China against 111 MT in India. India’s GFCF in FY19 reached Rs 55.7 million crore that generated (with usual assumptions) a demand of around 68 MT of steel for infrastructure and construction sectors in last year which could have been much more but for the limited availability of GFCF.


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