Steel industry seeks booster for demand revival amid economic slowdown

Spending on public infrastructure and a cut in goods and services tax (GST) on automobiles is required to spur demand for steel in the immediate term, say steel industry heads.

Their prices are at a 10-month low, with the landed cost of import now higher than domestic prices by seven to eight per cent. The margin squeeze has prompted many secondary producers to cut output.
 
Against this backdrop, says the industry, the corporate tax cut announced by the central government is not going to change much for now. It is a positive for the long term but a demand pick-up in the near term would need other pushes.
 
“Every month, prices are falling. Our sales volume is down, operating profit is down. A GST cut in auto from 28 per cent to 18 per cent is required to boost demand,” said G H Bang, managing director of Korea’s Posco in India. An innovative and aggressive method is needed to take the economy out of stagnancy, he adds.
 
Posco’s downstream unit primarily caters to the automobile and construction sectors in India.

Jayant Acharya, director, commercial and marketing, JSW Steel, said public infrastructure spending would be key to boosting of consumption. While automobile sales have been in a slow lane since last November, spending on infra projects also started drying since then, in the run-up to the general election.
 
Around 60 per cent of steel consumption is accounted for by the infrastructure and construction segment. Automobiles account for 10 per cent; the sector takes value added and high-end steel.

With the corporate tax cut, he said, companies would look at reviving earlier capital expenditure plans. “It provides the opportunity for long-term investment.” In the immediate term, this would have to be coupled with a demand stimulus.
 
“Rearranging of tax slabs for the middle income group would help revive discretionary spending,” said Acharya.
 
The chief executive of a secondary steel producer said consumer confidence was too low. “No one expects the prices to climb up in a hurry. The later you buy, the more
you save.”
 
Prices of hot-rolled coil are around Rs 35,000 a tonne, the same as in June 2017. The lowest in recent years was in January 2016, at Rs 25,560 a tonne. The industry went through a prolonged down-cycle in 2015-2017. However, only 10 months earlier, prices had peaked at Rs 46,000 a tonne.
 
According to ratings agency ICRA, domestic steel consumption growth is expected to decelerate to five to six per cent in 2019-20, from 7.9 per cent in 2018-19, on the back of an unprecedented slowing in economic activity.
 
According to ICRA senior vice-president  Jayanta Roy, “Our analysis of prevailing trends at 22 companies, comprising 60 per cent of industry size, indicates reduced demand and steel prices amid firm raw material costs have restricted the revenues and operating margins of the industry in the first quarter of FY20.”
 
The decline in prices and seasonally weak demand are also likely to keep financial performance in the second quarter (July-September) muted, he added. A likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year, he added.