Steel woes not to go away too soon

In the past, too, the Indian steel industry had faced oversupply and below-cost product prices, resulting from large new capacity coming in a bunch. But, all that had happened with steel in earlier years paling into insignificance compared with the present state of the industry burdened as it is with bank debts of around Rs 3 lakh crore and heavy losses in the third quarter of 2015-16.

Steel Authority of India (SAIL) chairman Prakash Singh says the third-quarter loss of his company was primarily because of a "24 per cent fall in net sales realisation" on a year-on-year basis. He says, what was particularly disturbing about the period was the industry's inability to recover production cost from sale of some steel products. The crisis is not, however, country-specific. The toxic cocktail of sluggish demand and chronic overcapacity is taking a toll on steelmakers across the globe. China alone has capacity surplus of 300 million tonnes (mt).

Seshagiri Rao, joint managing director of JSW Steel, says "nobody in steel is making money". He quotes the Chinese Iron & Steel Association to say the industry in China is "losing $11 billion at the operating level for the past 11 months".

Lakshmi Mittal, who believed he had achieved invincibility by acquiring the European Arcelor at a hefty premium and courting racial innuendos, had the mortification of seeing the 2015 net loss of the merged ArcelorMittal rising to a record $7.9 billion. A big net debt is also hanging around the neck of ArcelorMittal, which is sought to be lowered to less than $12 billion by way of new capital raising of $3 billion and sale of its $1-billion stake in an automotive group Gestamp. Since the 2008 high of Euro 60.55, ArcelorMittal shares have skidded to Euro 3.71 now. In the process, the Mittal family with a holding of 37.38 per cent in the company, has lost an enormous amount of paper wealth.

Mittal has said "2016 will be another difficult year" for the industry. He must be finding it upsetting that ArcelorMittal's announcement of cost-cutting and focusing on high-margin products under the 'Action 2020' plan to improve core profits by $3 billion a year has failed to convince independent observers. This is largely due to the industry losing pricing power heft in an oversupply situation. Moreover, shaving cost is a continuous programme with most makers over the world, including India. Regrettably, in the current high-import regime, producers must pass on cost savings to buyers.

The price outlook here has started improving on the back of New Delhi first introducing safeguard duty and then minimum import price (MIP) on 173 steel products. The provocation of raising the tariff barrier was to give local producers protection from foreign origin steel coming in with lower prices. Rao has said,"It is unlikely that (steel) prices will move up to the MIP level unless supply-demand dynamics change with robust demand."

New capacity is constantly getting created. Tata Steel has recently commissioned a 3-mt plant at Kalinganagar in Odisha. SAIL is ramping up saleable steel production from 13 mt to 20 mt.

The industry is pinning hope on the renewed government focus on infrastructure development and making a success of Make in India programme, says Singh. The Budget provision of nearly Rs 1 lakh crore for road construction, development of greenfield sea ports and revival of old airports lying unused, should create good demand for steel.

Whatever it is, the near- to medium-term outlook for the metal remains grim. This is a compelling consideration for banks to give stern messages to defaulting steel companies to put their house in order. Steel companies need to be pushed to sell unrelated assets built injudiciously in the past frittering away resources that should have been preserved to see them through bad times.

TROUBLED TIMES

• Indian steel faces oversupply and below-cost product prices
   
• Unable to recover production cost from sale of certain products
   
• Problem not limited to India.
   
• China has capacity surplus of 300 million tonne of steel and has been losing $11 billion at the operating level