Export and import of engineering goods have a close relationship with steel. In terms of steel intensity, the exports of mechanical machinery, metal products, auto and auto components, electrical equipment, domestic appliances and other transport are known to provide a boost to steel consumption. In India, it is estimated that around 22% of steel demand is generated by machinery and engineering goods segment. With the improvement of industrial production and specifically of the manufacturing sector, the demand for steel, particularly for various value-added grades, goes up due to higher offtake from this segment on account of either the domestic market or for exports in which case it earns the precious foreign exchange for the country.
However, the export of engineering goods containing steel does not add to the domestic demand for steel and therefore the finished steel equivalent of the volume of engineering goods exported is to be taken out from the Apparent Steel Use (ASU) in the country. Based on the same logic, the finished steel equivalent of the import of engineering goods must be added to the domestic ASU. Thus, the net exports of indirect trade (export minus import of engineering goods converted to finished steel equivalent) is to be deducted from ASU to arrive at what WSA terms as True Steel Use (TSU).
Conceptually, this is the correct view of export and import of steel containing goods, but realistically from the steel producers’ point of view, the sales of large volume of steel sold to engineering exporters goes to the marketing efficiency of the units which hardly looks at the depletion of TSU volume of the country by this action.
On a similar note, India is trying hard to develop indigenous capacity (Make in India) for machineries and equipment required for, say, new steel capacity augmentation. Otherwise, the large scale of imports of capital goods in the form of machines and equipment for steel plants would have to continue by spending huge foreign exchange and make India import dependent. But the good news is that these imports containing steel go to enhance the TSU in the country. This appears to be a paradox and makes us to believe that only ASU needs to be considered for capacity augmentation planning, while TSU be confined to the domestic market absorption capacity at a particular point of time. It goes to the credit of WSA that an attempt has been made to arrive at the TSU of various countries by building up a time series of data from 2000 to 2017. However, the data for the initial years were a little sketchy for want of appropriate countrywise details. The Harmonised Commodity description and Coding of data (HS Code up to 6 digits for the traded goods) and equivalent steel coefficients for aggregated HS Code up to 4 digits only have been taken into account. The data source is UN Comtrade (UN Commodity Trade statistics database) and the data is available in both value and volume terms.
It may be mentioned here that a single steel coefficient for each of the 6 digit HS Code for all countries, for all the years and for both exports and imports have been taken. Experts’ survey is also undertaken periodically to determine the changing pattern of average steel use in 6 major commodity groups denoting the engineering goods, namely, metal products, mechanised machinery, electrical equipment, domestic appliances, automobile and other transport. In our terminology, the domestic appliances fall under the category of consumer durables, but the category involves trading. In addition, steel content of these 6 engineering goods must vary widely among the countries and may be changing over the years with thrust on low weight higher strength steel.
In 2017, India exported engineering goods in the above 6 categories of 4.45 million tonne. In terms of finished steel equivalence, it comes to 3.53 million tonne. Imports of these items were a little higher at 5.33 million tonne and in terms of finished steel equivalence it comes to 4.27 million tonne, making India a net indirect importer of steel of 0.74 million tonne.
Thus, India’s ASU at 88.7 million tonne in 2017 goes up to 89.4 million tonne as TSU by deducting net indirect exports of steel (-0.74 million tonne) with ASC. For China, ASU of 736.8 million tonne in 2017 comes down to 669.2 million tonne as TSU by deducting the net indirect exports of 67.6 million tonne of steel. The comparison of engineering exports tonnages between China and India is mind boggling. In 2017, China exported automobile, including components at 16.9 million tonne against India’s export of 1.6 million tonne. China could export domestic appliances of 5.7 million tonne against India’s 0.03 million tonne.
The concept of TSU emerges from the way ASU is calculated as production plus direct imports minus direct export. By further deducting net indirect exports from ASU, it appears that development of steel intensive engineering exports segment in the country is a dampener to the actual steel use in the country. Looking at from this angle, the total deliveries undertaken by each steel manufacturing units to the actual user segments (OEM and other steel procurement agencies for infrastructure and construction) with some corrections for supplies to trade segment, seems to be a better indicator of steel use in the country.
(Views expressed are personal)