 "Steel's woes end after five-year slump")
The world steel industry has arrived at an inflection point, rallying from five straight years of losses that claimed many victims of mills in every producing country. The green shoots of a much-awaited turnaround are demonstrably visible in the working of three leading steelmakers — one each in India, China and South Korea — in the quarter ended September 2016.
Benefiting from “ramping up and stabilisation” of facilities at its mills at Vijayanagar in Karnataka and Dolvi in Maharashtra, heightened focus on maximum value addition to steel and selling branded products to realise premiums and success in exports in a competitive environment, JSW Steel in the September quarter could lift consolidated net sales by 32 per cent to Rs 14,180 crore and earnings before interest, tax, depreciation and amortisation (EBITDA) by 65 per cent to Rs 2,959 crore, both on year-on-year basis.
South Korea’s Posco, the world’s fourth largest steelmaker, scored the best quarterly profit since 2013 at $476 million against a loss of $478.50 million in the corresponding three months of 2015 because of the push given to value addition and over 40 per cent rise in steel prices in the current year.
Progress of steel prices of this order is attributed mainly to China falling back on infrastructure spending to give a thrust to its sputtering economy. The boom in construction as the Chinese turn manic to buy apartments at rising prices is another reason for the improvement in the steel market sentiment.
Moving up the ladder
The factors that contributed to the enrichment of JSW Steel’s bottom line were all at play more strikingly at Posco. What has particularly impressed the rating agencies and the stock market about Posco is that nearly half its steel output now constitutes “higher value” products resulting from the company’s drive to restructure all its units.
Moody’s Investors Service has revised the rating for Posco from negative to stable based on the assessment that its finances are likely to show significant improvement through the rest of 2016 and then stay “stable over the next 12 to 18 months, underpinned by a recovery in earnings and debt reductions.”
China’s Baosteel, which, subject to government approval, is to acquire local rival Wuhan Iron & Steel to become the world’s second largest steelmaker with production capacity of 60 million tonnes, heralded a good earnings quarter for many groups across the continents where migration to value added products from commodity steel has happened to a significant extent.
Aided by the “pickup in the steel market as a whole,” owing principally to Beijing’s fresh stimulus programme to aid infrastructure development, Baosteel’s quarterly net income of $315 million was the highest since 2012.
Even while groups making steel using the blast furnace route will have to contend with high coking coal prices, industry leaders in India, China and South Korea should produce good results for the rest of the year. India operations of Tata Steel, which is the pioneer in the country in decisively breaking away from commodity steel by making high value added items for use in automobiles and other industrial applications, will start benefiting in a significant way as production at its three-million-tonnes-mill at Kalinganagar in Odisha for flat products is ramped up.
Taking a positive turn
But what are the prospects for state-owned Steel Authority of India Ltd (SAIL) which for the first time in a decade found itself deep in the red during 2015-16? Encouraged by government action against imports, leading to domestic steel prices improvement, and the company progressively benefiting from production stabilisation in new units resulting from the Rs 72,000 crore investment in a modernisation-cum-expansion programme, Chairman PK Singh says: “SAIL will turn around this financial year.”
As new rolling mills are turning out “more and more value added products” that are well accepted in the market, the real game changer for SAIL will be the yet to be commissioned universal rail mill designed to produce the world’s “longest single piece rail” and the three-million-tonne hot strip mill that is to make automotive grade hot rolled coils.
The company claims that on completion of the modernisation drive, hopefully by the end of this financial year, the share of value added products in its total output will be between 55 per cent and 60 per cent. To hasten the turnaround and then to sustain earnings, Singh will do well to sell growing quantities of steel as branded products, an area where Tata Steel has achieved remarkable success.
Input costs rise
Referring to coking prices sprinting nearly threefold this year, an industry official says: “Considering the demand scenario, it will not be easy to transfer the incremental metallurgical coal cost to steel prices. But when a steelmaker is selling branded value added products, it will have the assurance of getting premium prices.”
As the local supply of coking coal falls hugely short of the growing requirements of the steel industry, India will have to import 50 million tonnes in the current year against 43.7 million tonnes in 2015-16. Some relief will come the steelmakers’ way if the government agrees to abolish the 2.5 per cent import duty on coking coal.
There is no denying that steel has not looked this good in the past few years. But many are not sure about the further improvements in steel fortunes. World Steel Association (WSA) Secretary General Edwin Basson told the UK-based Metal Bulletin: “I am relatively confident that we have negotiated the turning point. The question is now about future growth. I don’t think it will be robust because there is no region at the moment that is strong enough.”
In its latest steel outlook report, WSA says that as “global investment remains weak,” global steel demand will rise by only 0.2 per cent to 1.5 billion tonnes in 2016 and then by 0.5 per cent to 1.51 billion tonnes. India will, however, be using 5.4 per cent more steel at 84.4 million tonnes this year, and the next year demand should be up 5.7 per cent to 89.1 million tonnes.
