Decommoditisation of steel to underpin success

The Indian steel market cannot but remain flat, as growth continues to elude the commodity's principal consumption points such as construction, automobiles and machinery-building. Braving resistance from buyers, steel makers raised prices by Rs 1,000-1,200 a tonne in the past three months, across long and flat products, to defray cost rises.

In the current environment, resistance to price revision is understandable. In the first three quarters of this financial year, demand for steel increased a piffling 0.5 per cent to 53.789 million tonnes (mt). Where will steel prices stand in the coming months? Steel Authority of India Ltd Chairman Chandra Shekhar Verma says, "Prices appear to have stabilised at current levels. Customarily, as the country goes into an election mode, it sees a slowdown in government sector spending. Delays in the launch of infrastructure projects and the general lull in investment should be over once a new government is in place in a few months. At this stage, I would venture to say the worst appears to be over for the steel sector."

SUNNY DAYS AHEAD?

• To defray cost rises, steelmakers raised prices by Rs 1,000-1,200 a tonne in the past three months, across long and flat products
• In the first three quarters of this financial year, demand for steel increased a piffling 0.5% to 53.789 mt
• SAIL recorded impressive growth in turnover and profit in the December quarter, thanks to the best quarterly production of 1.35 mt of value-added steel
• SAIL has 21,000 acres of surplus land at its five integrated mill sites for an additional 26 mt of hot metal in the next round of its expansion
• The phase-wise commissioning of flat capacity at a new mill will boost Tata Steel's turnover and profits quarter-on-quarter

The economy's growth, as well as raw material prices, is the principal determinant of steel prices. Globally, high idle capacity is not allowing steelmakers to post prices that give them decent margins.

Through the past few years, leading steelmakers, including Tata Steel, SAIL and JSW, are investing heavily to manufacture auto-grade flat and long steel, in an endorsement of global belief that India and China are the last two bastions of the automobile sector's growth. Wasn't that belief somewhat weakened in the wake of sales in Indian falling 6.7 per cent to 1.9 million cars in 2012-13, and 5.2 per cent to 1.45 million units between April and January 2013-14? In China, where the economy is slowing and anti-pollution and austerity campaigns gaining ground, deliveries of passenger vehicles are estimated to rise 10 per cent this year, against 14 per cent in 2013. An official of the Society of Indian Automobile Manufacturers says, "We have to wait for a new government before any demand revival."

Verma says the decelerating car sales are a "blip. Lowering of excise duty on cars of all sizes and SUVs (sports utility vehicles) in the interim Budget is what the automobile industry needed for demand improvement. Similarly, duty relief will give a push to sales of white goods. All this should result in automobile and white goods manufacturers requisitioning larger volumes of steel. Hopefully, the new government will stay the course laid down in the interim Budget".

In recent periods, large investments in flat steel products, particularly Tata Steel's investment in a three-mt project at Jamshedpur, will be justified once demand in the automobile and white goods market rebounds. But how did companies such as Tata Steel (for its Indian operations) and SAIL manage to record good results in the past two consecutive quarters of 2013-14, overcoming the challenges of an extended heavy monsoon and weak economic conditions? In fact, their working has been ahead of the median production and profit forecasts of sector experts. Incidentally, both the groups are engaged in ramping up capacity. They are, therefore, under increasing pressure to push more material into the market, amid a subdued demand environment.

"Despite a flat market, SAIL deliveries of finished steel rose seven per cent to 2.94 mt in the December quarter on a year-on- year basis. Production of saleable steel rose four per cent to 3.17 mt, partly aided by new capacity progressively coming on stream from our simultaneous modernisation and expansion programme. Defying market blues, SAIL recorded impressive growth in turnover and profit, thanks to the best quarterly production of 1.35 mt of value-added steel," says Verma. In an oversupplied market, the success of a producer will be underpinned by "decommoditisation of steel and branding of products".

At the same time, capacity expansion should be seen as an opportunity to induct new technologies, allowing production in an energy-efficient, environment-friendly and cost-efficient manner. This is being demonstrated at Tata Steel's Jamshedpur complex, where new flat steel capacity of three mt, based on an integrated thin slab caster and a rolling mill using compact strip processing technology, was put to use last year. The phase-wise commissioning of flat capacity at the new mill will boost Tata Steel's turnover and profits quarter-on-quarter.

Verma claims for "SAIL, the best will start happening in the next two-three years. That is the time our Rs 70,000-crore investment in expansion and modernisation will fully mature". What holds good for SAIL will also be the case with Tata Steel, which will start producing steel at its greenfield plant at Kalinganagar in Odisha in the second half of 2014-15. The three-mt first phase of the six-mt plant will further reinforce Tata Steel's position in the flat steel market by "augmenting the product range that will take care of changing customer needs". Unlike Tata Steel, which must acquire land to build new steel plants, SAIL has about 21,000 acres of surplus land at its five integrated mill sites for an additional 26 mt of hot metal in the next round of its $26-billion expansion.