PROJECT

BUSINESS CYCLES OF STEEL

SUBJECT- MANAGERIAL ECONOMICS 2

SUBMITTED BY- DIYA SAINI (2012685)

SUBMITTED TO - MS. MANISHA
 BUSINESS CYCLE OF STEEL INDUSTRY
We recall that the market scenario in Q1 of FY18 was dull. Prices
were down; capacity utilisation was poor, expansion plans were put
on hold and PMI exhibited bleak forecasts of new order booking
and were on the brink of contractionary mode. In the next 3-4
months’ time, the scenario got reversed.

While raw materials were no longer moving sharply southward,

finished product prices commenced upward journey on the back of
sudden investment push and gradually rising industrial production
despite the temporary complexities of GST implementation. GDP
dropped down to 5.6% in Q1, marginally rose to 6.3% in the second
quarter, subsequently jumped to 7.0% in Q3 before ending the year
with 7.7% growth in Q4.

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The economy clocked a record 8.2% rise in Q1 of FY19 and may
achieve a growth of 7.5% in Q2 of the current fiscal. As this analysis
briefly sums up the background of growth of steel industry, it has
become increasingly apparent that the scenario is highly dependent
on a corresponding health of global economy and the behaviour of
China, still the market leader in production and consumption. The
Global economy rose by 3.7% in 2017 and is projected to grow by
the same rate in the current CY.

The impact on steel prices was directly linked with growth

momentum in the economy. HRC export price went up from $ 450/t
fob Tianjin in June’17 to $ 548/t in October’18 with both global Iron
Ore prices ($ 57.15 /t cfr China in June’17 to $ 71.5/t in October’18)
and Metallurgical coal prices ( from $ 146.5/t fob Australia in
June’17 to $ 214.5/t in October’18) exhibiting the rising trend.

Three constraints raised their head in this otherwise growth oriented

scenario. One, the secular rise in Crude oil prices that put severe
strains on India’s CAD and threatens to bring in additional financial
pressures (with lower exports) due to the ensuing US sanction on
Iran that may further jeopardise India’s trade balance.

Second factor was US imposition of additional 25% duty on steel

and 10% on Aluminium across all trading partners. It was followed
by actual imposition of additional 10% duty on nearly $200 bn worth
of Chinese exports to USA which was promptly retaliated by China
by imposing additional duties on US exports to China. Some minor
reliefs have since been announced by USA with respect to NAFTA
partners, Brazil, South Korea and Turkey, but stiff rules of
Protectionism are currently ruling the global steel trade entering into
other areas like Agriculture and Service sectors.

Global trade volume has grown by 2.4% in 2017 and is projected to

go down to 2.1% in 2018. Third, China has cut down its capacity in
various commodities due to overheating of the economy and closed
capacities contributing to environmental pollution and has
reoriented its focus from investment to consumption. It has clocked
6.9% GDP growth in 2017 marginally up from 6.7% achieved in
2016 and is projected to rise by 6.6% in the current year.

It is now predicted by some analysts that the party is coming to an

end by Q2 of 2019 by which time the global HRC is to reach an
average $688 fob export port from the current $560 fob/t, a rise of
$128/t in the next 7 months. This implies that the current growth
cycle in steel is to last for 24 months only (Q2 of 2017 to Q2 of
2019). How strongly the above factors would accelerate the fall? Let
us look at China factor first. Chinese economy is still experiencing a
gain in fixed asset investment especially in Infrastructure.

Recently, People’s Bank of China announced plans for a $175 bn

stimulus to promote lending. The country is experiencing a housing
boom; however peak housing prices may go in for a decline. It has
procured 803.3 MT of imported Iron Ore in the first 9 months of the
current year. Its steel exports during the period have come down to
53.1 MT, a fall of 10.7% compared to last year.

Domestic price of Chinese HRC ($ 612 /t ex-works (incld.VAT) in

October’18) is ruling at $ 64/t more than the export price despite
depreciation of RMB by 6-8% in recent months. In fact the currency
depreciation in China, Argentina, Turkey, Brazil, Vietnam, Indonesia
and India as a fallout of rising US interest rate to 2.25% from
1.5/2.0% a few months’ earlier and rise in domestic inflation does
not appear to be a strong factor that would derail these economies
in 2019.
Chinese production of Crude steel had reached 831.7 MT in 2017
and is projected to grow by 5-6% in 2018. The capacity closures in
China more on account of pollution regulation have enabled it to
eliminate inefficient capacities that were a drag on the finances of
banks and other FIs. The consumption of steel in China at 736.8
MT in 2017 is slated to reach 781MT in 2018 (including unreported
steel by IF sector in 2017). However, a nil growth is envisaged in
Chinese steel consumption in 2019 by WSA which may not come
true.

As long as domestic demand is rising ( 6.0% rise in 2018 and 7.6%

in 2019), lower steel exports by India due to protected export
markets of US/EU can be managed. The challenge is to make
provision for more investment to make up infrastructure deficit, an
accelerated push to Housing activities and maximising
manufacturing production which all can only maintain stable and
consistent growth of Indian steel industry.

DIFFERENT TYPES OF
BUSINESS CYCLES

1. In the expansion phase, there is increase in economic

activity such as production, employment, output, wages,
profits, demand and supply of products and sales.

2. The economy then reaches peak, where the

maximum limit of growth is attained and economic
indicators do not grow further. This stage marks the
reversal in trend of economic growth.
3. In the recession phase, the demand for goods and
services starts declining rapidly. Prices tend to fall and
economic indicators such as income, output and wages
start to decline.

4. The growth in the economy continues to decline and

there is rise of unemployment in the depression phase.

5. Demand and supply of goods and services and their

prices reach their lowest levels in the trough phase. There
is extensive depletion of national income and expenditure.

6. In the recovery phase, there is a turnaround from the

bottom and the economy starts recovering from the
negative growth rate. Demand and supply pick up and there
is a positive attitude towards investment and employment.