Viewpoint: Indian steel demand awaits economic stimulus

Increased spending on infrastructure and a gradual recovery in some downstream sectors could spur Indian steel demand in 2020. But the true extent of any rebound in demand growth will depend on the government's financial health, which will determine its ability to put more money into building roads, highways, pipelines and rail lines.

Indian steel demand growth for the 2019-20 fiscal year ending 31 March is expected to be lower than 5pc on the back of reduced downstream demand from the auto and construction sectors. Government spending on infrastructure has been lower than expected, with a deepening economic slowdown reducing tax inflows and spending being squeezed to contain a fiscal deficit. Finished steel consumption for April-November grew by 3.5pc from a year earlier to 66.46mn t.

The squeeze in 2019-20 was preceded by robust growth in steel consumption, largely on the back of infrastructure demand when demand grew by 8pc and 7.5pc in 2016-17 and 2017-18 respectively. But in previous years steel demand growth has been lower, with average growth of 3.55pc from 2010-11 to 2014-15 and 5pc from 2014-15 to 2018-19.

Delhi in February this year announced a plan to invest $1.5 trillion in infrastructure projects over five years, although it did not provide any details on investment targets for each fiscal year. A pile-up of unpaid debts at Indian banks has made banks reluctant to lend to infrastructure and industrial projects, while a shortfall in tax collections has squeezed the government's ability to spend. But several key infrastructure projects from expanding rail lines, building pipelines for oil and gas and water supplies, speeding up development of freight corridors, affordable housing and electricity distribution are likely to pick up pace, as the government funds initiatives through the sale of the state's stakes in public sector companies and lifting tax collection.

The demonetisation of India's 500 and 1,000 rupee banknotes in 2016 to curb tax avoidance dealt a severe blow to cash transaction-driven real estate sector, drying up a key source of steel demand. A sharp slowdown in auto sales for over a year saw auto producers working fewer days a week and laying off workers, which also sapped demand from another key downstream market.

A 250bn rupee ($3.52bn) bailout package for stressed real estate projects rolled out by Delhi may lift construction activity, which could also encourage private-sector real estate participants to accelerate building activity. But a massive overhang of unsold housing units could dampen the launch of new projects. As of September 2019 seven large Indian cities had 656,000 unsold units, which will take at least 2½ years to clear, said Mumbai-based real estate consultancy Anarock.

There could be some increase in automobile sales as uncertainty over adoption of vehicle emissions standards ends in April 2020 with all new vehicles to be compliant with Bharat Stage (BS) 6 regulations, while there is a mix of BS4 and BS6 compliant vehicles currently being sold.

The country's central bank the Reserve Bank of India (RBI) expects banks to gradually increase the pace at which they are passing on interest rate cuts made since February 2019 to industrial and retail borrowers. Lower mortgages for buying houses and cars could stimulate downstream demand for steel products.

"Several measures already initiated by the government and the monetary easing initiated by the Reserve Bank since February 2019 are gradually expected to further feed into the real economy," RBI governor Shaktikanta Das said on 4 December.

There are also expectations that Delhi will announce cuts in personal income tax rates in the federal budget due in February, which will add to spending power and stimulate consumer demand.

India's steel demand has largely tracked the trend in gross domestic product (GDP) growth. The Asian Development Bank on 10 December forecast a 6.5pc GDP growth rate for India in 2020-21 on the back of supportive policies, while 2019-20 growth is projected at 5.1pc.

The World Steel Association in October forecast growth for Indian steel demand at 5pc in 2019 and at 7pc in 2020.

By Prasenjit Bhattacharya