Forecasting steel demand has been a popular theme among analysts and policy planners. Of the various techniques followed for this purpose, the one relating to GDP of the country has popular appeal.
The advantage of this technique lies in making economic growth (captured comprehensively by GDP) as responsible for the growth of steel consumption.
The elasticity component based on a series of two variables over the past two decades (minimum) is applied on the projected GDP in the coming years to arrive at the steel consumption rate.
The demand projections for a number of other commodities such as petroleum products, cement are also undertaken on the same methodology. One major limitation of this technique is that it does not look at the composition of GDP. Also the intensity of investment is not similar in all product segments.
Thus, if the GDP is contributed more by service sectors and less by the industry sector, the growth may not impact steel consumption growth in the same manner as earlier. In Q2 of FY14 GDP, around 12% is contributed by agriculture, 26% by industry and the balance 62% by the service sector alone.
If this composition continues, the elasticity component of 1.11 is bound to fall sharply as more investment in various elements of service sector (trade and insurance, financing and banking, business services) would have much less steel intensity. This clearly disconnects the strong linkage between steel consumption growth and GDP and should make us rethink on our emphasis on forecasting demand only on GDP growth and look for alternative methods.
The best alternative undoubtedly is the sectoral model where the behavior of steel using major segments is projected on the basis of intensive interaction with the major players in each of these segments, identifying a few economic variables that capture the growth and development of these segments and assessing the growth prospects of these variables.
If lack of investment is plaguing the growth of any of these segments, that would be logically established as a major factor to monitor. The robustness of sectoral model is reflected in evaluating the role of factors other than investment ? monetary, fiscal and trade-related factors inhibiting the growth prospects of the sectors ? and to assess if suitable policy decisions can take care of the weaknesses.
The compulsion of the share of manufacturing sector in GDP to be increased from the current 14.6% to 25% in another 10 years time would provide a tremendous push to steel consumption due to its intensive nature.
Accordingly, the nature of analysis is to shift from single-minded pursuit of relating steel demand with GDP to the role of various other macro variables such as industrial growth, capital formation, credit growth, inflation rate, exchange rate in shaping the futuristic behavior of different sectors.
It needs to be appreciated that forecasting demand for a dynamic sector having a complex network of backward and forward linkages with significant implications on employment and income generation cannot be left to a simplistic arithmetical calculation of elasticity with GDP. Growth in domestic product summarizes all economic activities belonging to both steel and non-steel categories.
Let us pick up the former exclusively for a more focused analysis on demand projection on steel.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal
