Steelmakers brace for 'short-term' headwinds

As the industry contends with surging imports, it is getting some help from firm finished steel prices and softening input costs

Whenever the economy hits an air pocket, Indian steelmakers worry about weak demand. Especially so this time because India’s 2017-18 first quarter growth of gross domestic product at 5.7 per cent was not only at a three-year low, but manufacturing gross value added rose 1.2 per cent, far slower than 10.7 per cent in the corresponding quarter of the previous year. Moreover, unresolved problems linked to the Goods and Services Tax and the strong rupee are making it difficult for India to take advantage of the buoyancy in global trade seen by the World Trade Organisation. 

An official of a major steel company, who requested anonymity, says there could be a rollover impact on steel demand if the twin pressure of containing the year’s fiscal deficit to 3.2 per cent — by August, 96.1 per cent of the 2017-18 Budget estimate was reached — and slow economic growth, forces the government to apply the brake on infrastructure spending. What the future holds for local steelmakers in terms of demand growth can only be guessed. The industry is getting some help by way of firmness in finished steel prices and moderation in coking coal and iron ore prices. At the same time, it has to contend with a surge in steel imports in the first five months of the current fiscal, with the August figure worryingly crossing 1 million tonnes (mt), resulting in a pile-up of inventories with mills. 

According to steel ministry’s Joint Plant Committee, Indian steel demand during April-August grew 4.4 per cent to 35.329 mt, on a year-on-year basis. In April, the World Steel Association, however, said in a report that Indian steel demand in 2016 would be up 6.1 per cent to 88.6 mt and next year by a still higher 7.1 per cent to 94.9 mt. Whatever the ground reality, steelmakers  will prefer looking at present pains as “short-term headwinds in the form of imports and surplus capacity”. 

The observation is a pointer to steel producers abroad remaining under pressure to export as world production between January and August climbed 4.9 per cent to 1.122 billion tonnes (bt) from 1.069 bt in the corresponding period of 2016. Despite continuing capacity stripping, China’s production till August rose 5.6 per cent to 566.405 mt. 

Industry leaders here prefer to look beyond the present pains to the promise of sustained demand growth. Tata Steel Group Executive Director Koushik Chatterjee and Managing Director TV Narendran in a joint statement say, “Given the current stage of development of the Indian economy and the likely growth path for the next decade, especially in automotive and infrastructure sectors, steel demand will see significant growth in the coming years.”

In an almost identical vein, Steel Authority of India Limited (SAIL) Chairman P K Singh argues that the government’s commitment to reforms is “providing a platform for per capita steel consumption to rise to 160 kg and steel capacity to 300 mt by 2030-31.” But with so much capacity in sick bay and the Reserve Bank having asked the lenders to take bankruptcy proceedings against some leading steel companies to conclusion, many have reasons to doubt if per capita use could be raised by 97 kg in the next 14 years. 

The world’s largest steelmaker, ArcelorMittal, and highly innovative Posco of South Korea have beaten a retreat on their ambitious plans to build mega mills here. Even then there are some silver linings. For example, Tata Sons Chairman N Chandrasekaran claims the deleveraged Tata Steel in India, following the merger of Tata Steel Europe with ThyssenKrupp of Germany, moves into pole position to double its 13 mt crude steel capacity over the next five years.  Narendran says while Tata Steel has the option to grow inorganically, Kalinganagar in Odisha, where it has 3,000 acres of land, offers “immense capacity growth opportunities.” 

In JSW and Tata Steel, the country has two robust groups that are ready to come to the rescue of ailing mills. JSW’s credentials in this regard are well proven, most notably the way it turned around the Dolvi plant it acquired from Ispat Industries in 2011. On the basis of efficient execution of a 3 mt mill at Kalinganagar and then its quick capacity ramp-up, Tata Steel is seen as the ideal suitor for groups that have run into major financial problems in their attempts to build greenfield mills. 

In contrast, SAIL, which is taking an unconscionable time to complete its Rs 72,000-crore modernisation and expansion programme and admits to its “deficiencies by way of delays in ramping up production in new units”, has wisely decided to ignore the urgings of banks that it take charge of some sick steel capacity. Nor will it be advisable for SAIL to attempt any fresh capacity expansion before it makes progress from an earnings before interest, tax, depreciation and amortisation (EBITDA) positive state to a sustainably net profit earning group. 

What will help SAIL in its pursuit of net profit goal and the likes of JSW and Tata Steel to boost earnings this year is the continuing buoyancy in steel market here and abroad while prices of metallurgical coal and iron ore are down by a few notches from their April highs. Two principal reasons for SAIL turning EBITDA positive in 2016-17 and Tata Steel growing profit after tax by 2.6 times to Rs 3,445 crore last year were improved price realisations across geographies and their focus on value added differentiated products. In the absence of strong domestic steel demand growth, the country raised export by 102 per cent to 8.24 mt in 2016-17, and in the first five months of this financial year, overseas dispatches were up by 45 per cent to 4.1 mt. In firm global prices, Indian steel balance sheet will find succour.