Sushim Banerjee
Assessment and forecasting of demand for any commodity is an integral part of business strategies of any manufacturing unit. For a commodity like steel that serves as the primary raw material for a host of other sectors in construction, infrastructure, communication, transport and other processing industries, the analysis of demand must look at all major economic factors that influence the health and behaviour of these end-using sectors.
For instance, capital formation as a proxy for investment, disposable income of the household, interest rate movement impacting the personal loan market, inflation rate, industrial production and specifically manufacturing production, output of machinery and equipments and consumer durables --- all are important macro factors that need to be considered to evaluate aggregate demand for the metal. An aggregate assessment of demand for finished steel is essential for capacity planning (always expressed in terms of crude steel), investment needs, raw material support, logistic requirement and market share analysis. Globally a country is ranked and evaluated by the output level of crude/finished steel.
As a country’s GDP summarises the activities of all other macro indicators in the economy, the aggregative forecast of steel demand is traditionally based on the inter-relationship of steel consumption and GDP growth to work out the elasticity and utilise the same for forecasting steel demand with different scenarios of GDP growth. The same methodology is applied for all other commodities, including oil and power.
With the development of the Indian economy, particularly in the last three or four decades, the composition of GDP and not GDP growth alone has significantly influenced demand for commodities, depending which major sectors impact the growth of the particular commodity.
Of major sectors, agriculture, forestry and fishing hardly consume steel, tertiary sectors comprising financing, trade, hotels, insurance, community, social and personal services, transport, communication, real estate and business services are much less steel-intensive as construction activity of hotels, real estate, transport (auto, rail) and communication (tower etc) is captured under construction grouped under the secondary sector.
Demand for steel is largely dependent on the behaviour of the secondary sector that consists of mining and quarrying, manufacturing, electricity, gas and water supply and construction. The rate of growth of the secondary (industry) sector and share of this sector in GDP are the two most important determinants of steel demand in India. We have been experiencing a stagnant share of the secondary sector at 26% and of manufacturing at 15% for the last few decades compared to 45% and 32% share of industry and manufacturing in China. This fact largely explains the slower growth of steel consumption in the country compared to the potential that exist in steel intensive sectors that could have been unleashed by higher investment in infrastructure, moderation of interest rate to boost corporate investment and domestic spending.
As a case in point, the economy grew by 9.5% in FY06 when the share of industry and manufacturing at 28% and 15.3%, respectively, was higher compared to other years and rate of growth of steel consumption was also higher at 13.9%. In the following year, GDP growth was 9.6%, contributed by 28.7% and 16% share of industry and manufacturing sectors which got reflected in higher growth in steel consumption at 12.9%.
Next year, corresponding rates in GDP’s share of industry and manufacturing were 9.3%, 28.7% and 16.1%, respectively, and steel consumption grew by 11.4%. In FY14, GDP growth slumped to 4.7% with industry and manufacturing shares falling to 26.1% and 14.9% only and steel consumption growth nosedived to 0.6%.
Thus it is not merely the growth but composition of GDP that has a marked influence on steel consumption. Further elaboration of this aspect in demand assessment would be made next week.
Source: FE
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