Nov 27 2017

Fortnightly update – Week 47 of 2017

Fortnightly update – 12 to 25 Nov, 2017

Not much of preamble or introduction this time. Will move straight to the update.

Just that I will be talking about the performance of the Indian steel sector vis-à-vis the global industry and also about the foreign trade performance for Oct 2017, which gave a jolt to many of us.

I have also been talking to a few people about the upwardly mobile LIBOR, but haven’t been able to draw a convincing reason for the drastic increase over the past two-three months. 12-month LIBOR which was at 170.90 bps as on 07 Sep 2017 has now moved to 193.01 bps as of 23 Nov – an increase of about 22 bps in about 12 weeks! Will continue to explore and let you know once I’m able to understand. Meanwhile, those of you who are borrowing in FCY for longer term might want to look at ways to keep your interest rates hedged.

India’s steel industry losing steam?

  • The Indian steel industry had a marvellous run in 2016, a lot of it due to protectionist measures adopted by the government by way of minimum import price to curb dumping
  • These measures made the industry grow the fastest amongst all large global producers, and also compared to the overall global industry performance

·       Indian steel industry produced 95.6Mn tonnes of crude steel in 2016, as against 89Mn tonnes in 2015, growing at 7.4% y-o-y

·       Compared to this, the global industry, drawn down by the lacklustre performance of the largest producer China, grew at a sedate 1.34% y-o-y

·       While the Chinese industry still accounts for almost half of the global production of crude steel, India had been able to marginally improve its share in the global production from 5.51% in Jan 2015 to 6.26% in Dec 2016

·       So much so, that even in core sector performance indices, out of the 8 infrastructure industries, Steel grew the fastest at 10.7% during FY2017

·       The other two large producers, Japan and US, saw their domestic steel industries declining marginally in 2016, as compared to the previous year

·       However, things haven’t been looking so great for the Indian steel sector recently, and the industry has been consistently underperforming the global figures in the past few months

·       Indian steel industry has grown at 4.34% y-o-y in Oct 2017, as against 5.55% growth of the global industry

·       It is the 5th month in a row that the Indian industry’s growth rate has lagged behind that of the global industry

·       Indian industry performance dropped from a high of 17.45% in Jan 2017 to 1.03% in Jun 2017, before recovering slightly and settling at around 4-4.5% now

·       In fact, out of the top 4 steel producing nations, India occupies 3rd place in terms of growth consecutively for the past 4 months

·       Only Japan, whose industry has clocked negative growth for 6 out of the past 10 months, has performed worse than India

·       The US industry has recovered strongly, and has been consistently bettering its monthly performance since May 2017 when it hit its lowest level of -1.13% growth

·       Steel industry in the US grew at 12% y-o-y in Oct 2017 as compared to the -5% growth during the same month last year

·       This consistent low growth run has evidently affected the year-to-date performance of the Indian industry, with India being the only one of the Big 4 producers to have a YTD performance lower than last year

  • Even the Japanese industry has managed to marginally better their YTD performance from -0.4% in 2016 to -0.2% in 2017
  • YTD Jan to Oct, the global industry grew at 5.3% in 2017 y-o-y as against the 0.5% growth figure achieved in 2016
  • Thanks to high growth rates in the first 3 months of the calendar year, India’s growth rate is still the highest of all the large producers at 5.8%, but the gap is closing fast
  • The Chinese industry is currently growing at 5.6% per annum, compared to the 1% growth that they achieved last year
  • Considering the size of the Chinese industry – almost nine times that of India – this is truly a remarkable achievement
  • In terms of volume, India is currently the 3rd largest producer of crude steel, behind China (807.6Mn tonnes) and Japan (104.8Mn tonnes), but considering the declining trend of Japan’s production, there is an excellent opportunity for the Indian industry to become the second largest in the world
  • The sector itself is critically important to the economy, considering that it feeds into infrastructure, automotive, and other manufacturing industries, and therefore, is often said to be indicative of the state of the overall economic activity
  • The decline in growth is not to be taken as an indicator that the sector is in a bad shape. Albeit, the sector is seeing significant growth in investments, with planned capacity addition of 400+Mn tonnes per annum by 2025
  • Large players like SAIL have undertaken modernisation plans for its 6 plants, with the objective of increasing capacity from the current 13 Mn Tonnes Per Annum (MTPA) to 50MTPA by 2025
  • With one of the lowest per-capita consumption of steel in the world, the domestic market itself holds immense opportunity for the Indian Steel industry. Companies have also started thinking beyond the protectionist mindset to focus on technological innovation to raise the industry to global standards. The future is, indeed, bright, for the sector.

Exports decline for the first time in 15 months

  • Merchandise exports posted their first negative growth in 15 months in Oct 2017, registering a decline of -1.1% y-o-y, as against a healthy 8.9% during the same month last year
  • Imports continued to grow in Oct 2017, the rate of growth at 7.6% was the lowest in the past 10 months; merchandise imports grew at 10.7% in Oct 2016

·       It has been a steep fall for exports, from the 25.7% growth achieved in Sep 2017, which was only marginally lesser than the high of 27.6% growth achieved in Mar 2017

·       Sep was also the only month in the past 10 months when export growth outpaced import growth

·       Imports have grown at a considerably faster pace than exports during most of the current financial year, and this has consequently led to a widening of trade deficit

·       In fact, monthly trade deficit on merchandise trade has widened to $14.02Bn in Oct 2017, the highest in the past 3 years

·       YTD trade deficit has already hit 80% of what it was during the full year last fiscal

·       YTD Apr-Oct merchandise exports are growing at 10%, while imports are growing much faster at 22.3%. Trade deficit of $86.1 Bn, consequently, is 57% higher than what it was during the same time last year

·       Looking at some of the key product groups which contributed to this performance during the month, we find that decline in Gems & Jewellery and Ready-Made Garments (RMG) contributed to a loss of $1.5Bn in export turnover compared to Oct 2016

·       In percentage terms, most decline happened in RMG at 39% compared to last year, which also pushed this product group from 4th place in Oct 2016 to 6th place this year

·       Growth in Petro products (14%) and Engineering goods (11.8%) added incremental turnover of $1.03Bn, which did not compensate fully for the decline in Gems & Jewellery and RMG

·       While Petro product exports had grown by 37% and 40% in Aug and Sep 2017 respectively, growth in Oct is much lower

·       Similar is the case for Engineering goods, which had grown by 20% and 44% in Aug and Sep 2017

·       Cumulatively, the top 6 product groups contributed to a decline of $350Mn in export turnover during the month

·       Imports, on the other hand, had a different story to tell

·       The top 6 product groups (ranked by import values of Oct 2017) contributed to a net increase of $2.9Bn as against Oct 16

·       Below chart shows import performance of the top 5 product groups, and that of Transport Equipment, which was in 4th position last year, but dropped to 8th position this year

  • Transport equipment imports declined by $1.42Bn (48%) to become the worst performing product group by value in Oct 2017
  • Coal imports increased by 66% ($806Mn), while import of Petro products grew by 28% ($2.03Bn) in Oct 2017 as against same month last year
  • Gold imports declined for the second month in a row in Oct, to end at $561Mn lower than same month last year
  • It appears that the significantly high export growth exhibited in Sep 2017 was an outlier caused by fulfilment of pending orders, which had been held up due to GST issues
  • We should also hope that the current month’s negative growth is an outlier in the reverse direction, which will get normalised from next month onwards
  • With businesses becoming comfortable with the GST process, things should improve henceforth, and we should look forward to better performance in the future

Some numbers to note