Now a days many Industry Associations are organizing meetings and seminars to deliberate on steps needed to resurrect a particular segment of industry. The conclusions drawn at the end of these meetings invariably talk of capacity expansion, the roadmap for tariffs, required investment and facilitating government policies. The sustenance of demand on a long-term basis is always taken for granted. It is presumed that if domestic demand fails to materialize, the global market would provide the cushion. May be the current euphoria on demand growth by nearly all major segments of the industry and a reasonably good bottom line of companies have contributed to a comfortable perception that demand would no longer be a constraining factor. However the experience of 1994-95, 1995-96 and events thereafter in the history of Indian Steel Industry had amply demonstrated the perils of capacity creation in anticipation of sustained demand particularly in flat products. After 1995-96 for the next 7 to 8 years the availability continued to exceed demand and the producers were left to compete with a declining landed cost of imported steel, some of which were not even of prime variety. From the users point of view the recessionary trend in their end products and poor track of infrastructure investment culminating in slow growth of construction sector forced them to tighten belts on raw material costs and search for cheaper steel and poor substitutes. This has been the scenario in almost all-major steel producing countries in this period. Industry losses mounted and capacity additions were considered a taboo.

Globally this phase in steel sector was extremely turbulent with import restrictive measures including antidumping, countervailing and safeguard duties being liberally imposed. The proponents of free trade resorted to Section 201 in March 2002, hike in tariffs and compulsory restriction on imports from capacity-surplus countries became the order of the day. USA spearheaded the Steel Subsidy Agreement under the aegis of OECD to thwart attempts of various governments to subsidise the so-called inefficient capacities. A large number of bilateral and regional trade blocks emerged, thereby further shrinking the market for exports.

The question is to what extent the outlook is different now. Have all the knowledgeable minds become so confident that irrespective of what occurs to steel demand, only two issues, namely, fresh capacity creation and planning for basic raw materials ought to engage the attention of all steel producers. On the other hand, the principal concerns of the user segments seem to have been confined to containing steel prices and ensuring availability of a few special grade steel, which is currently imported. In late 80s and early 90s with designs for fresh capacity additions still on the drawing board, an optimistic scenario on demand could be projected based on unleashing of early rigours of licence-raj, so that on completion of some of the new steel projects in 1994 and 1995, growth in steel consumption sustained the additional availability. But things turned sour subsequently.

A comparison of industrial growth and its principal components in early 90s with the current period would clearly bring out the justification or otherwise of the present concern of both producers and users. First, let us presume that for steel demand it is Industrial production growth and not GDP alone that should be taken as a basis. This is for the simple reason that steel intensity of Industry or Secondary sector is much higher than that of GDP, which comprises of Primary and Service sectors in addition to Secondary. And therefore a direct linkage or a lagged impact of Industrial growth and steel consumption can be best indicative.

During 1994-95 and 1995-96 industrial output registered growth rates of 9.1 and 13 per cent respectively leading to an average 16 per cent rise in steel consumption. Subsequently industrial growth had a downward growth to 4.1 per cent in 1998-99 and 2.7 per cent in 2001-02, the years, which also witnessed a sharp deceleration in steel consumption in the country. In these two years the Consumer Durable sector experienced spectacular growth of more than 16 per cent and 25 per cent, which still remain the highest in the last decade. The Capital Goods sector had a negative growth of 3.4 per cent in 2001-02 bringing down the total Industrial Production growth to one of the lowest 2.7 per cent in that year. Similarly the negative output in Consumer Durable sector to the extent of 6.3 per cent in 2002-03 brought down the growth in Industrial Output to a meager 5.7 per cent and correspondingly a 4.7 per cent increase in Steel consumption.

This brings up the issue of current trend in Industrial production and its major components. During April to October 2004 a 15.1 per cent growth in Capital Goods sector and nearly 16 per cent rise in output of Consumer Durable sector, had put Industrial Production back on rails at 8.4 per cent. The tentative assessment on steel consumption shows a growth of around 6.5 per cent during this period. It is to be noted that higher growth in Manufacturing (8.8 per cent as against 6.8 per cent in last year) is contributing to industrial growth. Manufacturing which encompasses both Capital Goods and Consumer Durable segments holds the key to increase in steel consumption.

A rough assessment on global steel consumption indicates that around 52 per cent of finished steel is consumed by Construction sector. Approximately 13 per cent of steel goes to Machinery and equipment sector, 21 per cent to Automobile, 5 per cent to Oil and Gas. In India the share of automobile in steel consumption is much less, although it is growing at a faster pace. The comparative share of Machinery and Equipment sector in Indian steel consumption is approximately 10 per cent, while shares of Oil and Gas, Consumer Durables, Agricultural Equipment and Rail track are quite substantial.

All these segments need to grow in strength to sustain the current momentum in steel consumption. The two basic requirements for this to happen are the enhanced purchasing power of the consumers whose numbers are continuously rising, now that the trend of urbanization is upbeat. The second one pertains to investment in infrastructure. The observations made in the Mid-term Review of Indian economy recently released are noteworthy.

"Government alone, even after fiscal consolidation and elimination of revenue deficit, will not be able to generate the required resources needed for adequate investment…. Thus there is a need to involve the private sector and also attract foreign investment. The surplus in the current account of the balance of payments indicates that domestic investment is even less than the domestic savings rate, which itself is relatively low by East Asian standards."

It has also been mentioned that Public-private partnerships are becoming an increasingly important alternative to traditional public investment. But necessary reforms in the system of user charges must precede this partnership.

The above analysis proves beyond doubt that sustaining demand on a long-term basis requires a few crucial changes in the pattern of economic development in the country. A doubling of steel demand in the next 7 to 8 years would necessitate that flow of investment keeps pace with demand for commodities, which, in turn, would generate demand for steel. As global demand forms an essential component of capacity planning, the sluggishness in indigenous demand may be compensated, at least partially, by higher exports. A close monitoring of all these aspects would be extremely important for planning for fresh capacity. Let us not presuppose the continuity of a strong demand trend in steel, rather work for creating an environment for this to happen.