The International Monetary Fund’s World Economic Outlook report paints a relatively rosier picture for the base metals market, citing better economic growth prospects in China, as the country’s economy is projected to grow at 9.5% in 2011 and 9% in 2012. A healthier Chinese economy augurs well not only for base metals, but for steel as well.
In August, global crude steel production rose 9.8% year-on-year (y-o-y), but the growth rate was lower than the 11.5% rise seen in the previous month, according to data from the World Steel Association (WSA). China was the key driver of growth, with steel output rising by about 13.8% during August.
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But a trend seen in previous months persists. The global steel industry growth continues to decline on a sequential basis. In June, it had declined by 1.1%, in July by 0.6% and this has accelerated to a drop of 2.3% in August. The European Union (EU) region seems to be a key reason for the decline, with output falling by 15% on a sequential basis.
Slower demand in the EU was expected due to seasonality—in August 2010, output was down by 11% sequentially—but the turmoil in the region could be another reason as well. If the situation in the region worsens, it could affect the prospects of the steel industry, the health of the Chinese economy notwithstanding.
Graphic by Ahmed Raza Khan/Mint
India’s figures in WSA’s data release have not been updated, so finished steel production data from the steel ministry is a better indicator of how the sector has been performing. Domestic finished steel production is up by 17% y-o-y in August due to higher capacity, but the problem is consumption, which rose by just 1.3%, lower than the 1.6% seen in July.
The saving grace so far has been that steel prices have generally held up, chiefly because international prices are relatively firm on the back of higher iron ore and coking coal prices. China’s growing steel production will ensure that the prices of these inputs, which it imports, remain high.
Another comfort for integrated Indian steel producers is the depreciation in the value of the rupee against the dollar, which makes steel imports relatively expensive, and exports more remunerative.
But crawling domestic steel demand is a key concern, and if steel prices slip from their current levels due to developments elsewhere, such as in Western Europe, steel companies’ financials could still come under pressure.