( Dr. A.S.Firoz is Chief  Economist at the Economic Research Unit of the
Joint Plant Committee and Convenor of Steel Exporters' Forum.)

The recent study of the World Steel Dynamics (WSD) about the steel market last year is important despite some questionable conclusions they have reached. The study vindicates some of the major positions we have been holding for a long time on the pattern of global steel consumption.

The questionable issues first. The study says that global steel consumption last year (calendar 2000) had touched 758 million tonnes - an all-time record. Although the organisation does not clearly spell out how they have reached this figure, from whatever they have shown, it looks based on a global crude steel production of 847 million tonnes and a ratio of consumption of finished products to production (or consumption?) of crude steel production at 0.895 : 1.

There are two problems.

One, this, at the most, may refer to apparent consumption and not real consumption. That is, it does not take into account the variation in stock during the year. Although there is no established and well-accepted estimate on the global steel inventory change last year, it is clear from the trends in the market and all discreet information received throughout last year that there was an accumulation of inventories during the year. Therefore, the actual consumption of steel was lower than what has been assessed by WSD.

Two, usually, if one takes into account historical data and also the operational statistics of the plants to account for the loss of material during the process of value addition, about 0.875 tonne of finished steel for a tonne of crude steel as equivalent is a safe figure. Therefore, the real finished steel that could be supplied to the market or held as inventories at the plant from the current production was to be around 741 million tonnes. The inventory accumulation last year could be anything close to 20 million tonne. That brings the real consumption of steel to about 721 million tonnes, say 720 million tonne rounding out, a number close to what we had estimated.

This point is not as much important as it will remain a matter of debate and statistical interpretation. What is extremely interesting is the finding of the WSD that globally, construction and capital equipment take as much as 41-42 per cent each of the total consumption of steel. This leaves only about 17 per cent for consumer goods, mainly durables.

A small point here and is a matter of interpretation again. They have assumed that 100 per cent of the rails go for capital equipment. Whether you call railway lines as capital equipment or part of construction is a matter that depends on how you look at it. I would like to put that in construction. For pipes also, WSD has assumed 80 per cent of the product to have gone to capital equipment. In fact, in my view, 80 per cent of that may be finding use in various construction related activities. With these, it looks that construction has a huge share in steel consumption.

The larger point is that both construction and manufacturing of capital equipment are triggered  by investment. If investment is  low, steel consumption will also be low. The output of the manufacturing sector, resulting from the rise in consumption in the economy as a whole, will not generate a significant demand for steel.

Prior to the Asian crisis, optimism had run high as everyone saw unbridled investment prospects in South East and East Asia. According to the recent report of the International Monetary Fund (IMF), the investment rate was maintained at about 31-32 per cent till 1997 in the newly industrialised Asian economies. Steel consumption also remained high during that period.

More than that, the expectation of the investment rate to continue at the same pace of growth generated huge euphoria about the prospects of steel consumption in the region. There was nothing wrong in it till everyone was proved wrong by the sudden and unexpected collapse of the economies there. Investment rate dropped to 23.3 per cent in 1998 and is crawling up since then to reach about 26 per cent last year. The IMF has forecast that the future is bright for these countries as they foresee the investment rate to pick up to 27.3 per cent during the period 2002-2005. This improvement is but nowhere near the  levels achieved prior to the crisis. Therefore, steel demand in the region will at best stabilise in the region but will not rise at a rate most steel makers will dream of.

Globally, the IMF has not forecast any major increase in the rate of investment in the coming years. This is to rise from 23.2 per cent recorded in 1999 to about 24.6 per cent for the period 2002-2005.

Therefore, contrary to the most popular perception, steel consumption globally would rise only at a slow pace for the entire present decade.

What about consumption growth ? For that, let me look at the savings rates. The global savings rate will remain more or less constant with some small increases forecast for the coming years. This picture is generally true for individual economic regions of the world. If there is no major change in it, consumption will remain more or less unchanged as a percent of the total income. Therefore, there is no consumption boom to be expected that can trigger, in its turn, a major investment upsurge.

This scenario is what is relevant in forecasting the future of steel. Not much is to be expected from what has been projected for the economies in general.

In India, there are reports already of investment slowing down. The production and import of capital goods have fallen. The index of industrial production for capital goods has fallen 3 per cent in the fourth quarter, 2000-01, year on year. There is a slowdown in the disbursement of funds by the All India Financial Institutions. The funds raised from the capital market also dropped sharply. The manufacturing sector is faced with excess capacity and slowdown in demand. The government backed and initiated infrastructure projects are not taking off in time. More worrying is the cloud of uncertainty that hovers over new infrastructure projects. Therefore, investment is not likely to rise despite sufficient availability of funds with the banks and the financial institutions.

This makes the steel prospects gloomy: in India and around the world.

With demand not showing up and production not dropping sufficiently, the pressure on the prices of steel continues to remain strong. The second quarter price rise was far less than expected. Today, expecting the prices not to fall further in the third and the fourth quarters of this calendar should be considered optimistic. The global steel mart has all the potential to turn weaker in the coming months.

(The views expressed here are of the author.)