India’s economic growth is positively correlated with the growth of its steel industry. Steel continues to have a strong hold over traditional sectors such as construction, housing, roads and railways. The steel sector accounts for nearly 2 per cent of the country’s GDP. The industry has benefited from government policies based on anti-dumping duties and rationalisation of import duties. With the government’s policy support and infrastructure push, the steel sector is showing signs of recovery after a period of slowdown. The fact that the country’s per capita steel consumption at 61 kg is less than one-third of the world average (208 kg) underlines the huge potential for the sector’s long-term growth, further aided by improving efficiencies and changes in steel usage patterns.
The capacity overhang in the global steel industry in recent years resulted primarily due to a slowdown in steel demand from China, the world’s largest producer and consumer of the metal. This created a supply gut in the world steel market, thereby leading to a fall in steel prices. The decline was particularly sharp between August and December 2015. Thereafter, prices picked up, albeit showing volatility, and it is in the past year that steel prices have increased and flattened on account of a pick-up in global demand, restructuring of the Chinese steel sector and restocking of domestic inventories in China.
In India, domestic steel prices have remained firm over the past two years due to favourable domestic demand and anti-dumping duty imposed on imports. With respect to raw materials, the international price of coking coal has been highly volatile, having a bearing on India as well, as the country imports coking coal in large quantities. The price of iron ore, on the other hand, has picked up in the international market recently. Apart from global pressures, the domestic iron ore industry faced several challenges in terms of capping of domestic production, regulatory interventions, etc. Going forward, there is a consensus among industry experts that average global prices of iron ore and coking coal will fall.
Globally, higher prices incentivised an increase in steel production in 2017. Chinese steel production rose by 6.1 per cent in the first 11 months of the year as against global production which rose by 5.6 per cent. Higher restrictive duties on imports have also incentivised production in the US and Europe, as companies seek to gain greater market share. Production in Europe and the US increased by 3.7 per cent and 3.9 per cent, respectively, in the first 10 months of 2017.
India is fast on its way to becoming the second largest producer of steel. In 2016-17, India’s steel production and consumption stood at 100.74 million tonnes (mt) and 83.65 mt respectively. From 2012-13 to 2016-17, production increased at a compound annual growth rate (CAGR) of about 5.4 per cent. The growth was backed by strong government measures such as the imposition of a minimum import price (to rein in cheaper imports) and higher budgetary allocation towards infrastructure sectors.
After facing headwinds that slowed consumption in recent years, global steel demand growth is beginning to face a cyclical upturn. Consumption demand is expected to pick up on the back of a momentum in global economic growth.
In India, the demand for steel is driven mainly by the construction, infrastructure and automobile sectors. These three sectors account for two-thirds of the total steel consumption. In the past five years, growth in steel consumption has been sluggish due to slow industrial growth and dismal project execution in the infrastructure space. Post-demonetisation, steel consumption has been under some pressure. This is because it is likely that the demand for steel from user industries such as construction and real estate will take some time to strengthen. However, it is hoped that the government’s push towards infrastructure will compensate for this reduction in demand.
According to the World Steel Association, global steel demand has been revised upwards to around 2.8 per cent for 2017. Stronger economic growth in the rest of the world, particularly in India and the ASEAN countries, will drive growing demand. However, the association predicts slower steel demand growth in 2018, particularly in China, the European Union and the US. In contrast, developing countries will continue to exhibit a robust growth in demand in 2018. The demand for steel in India is forecasted to grow by 5.7 per cent in 2018, while the corresponding figure for ASEAN is predicted to be 6.8 per cent.
After a gap of three years, India turned a net exporter of steel in 2016-17, aided by stiff tariff barriers restricting imports. With many importing countries restricting shipments from China with high duties, exports from India are set to continue rising. During the period 2012-13 to 2015-16, India largely remained a net importer of steel. In fact, in 2014-15, imports increased by over 71 per cent (to 9.32 mt), primarily due to a sharp fall in international steel prices relative to domestic prices. However, backed by the government’s protectionist measures, domestic steel manufacturers increased output in 2016-17. A country-wise analysis shows that India has been exporting steel to countries such as Italy, Iran, the UAE, the US and Belgium.
Installed capacity and utilisation
The total installed capacity of steel production stood at 126.33 mt in 2016-17, recording a year-on-year growth of 5.17 per cent. During the five-year period 2012-13 to 2016-17, production capacity grew at a CAGR of 6.82 per cent. The capacity addition, however, was higher than the offtake of the metal, resulting in capacity underutilisation. During 2016-17, the capacity utilisation rate continued to remain below 80 per cent from a high of about 88 per cent during 2010-11. This drop was on account of a ban on iron ore mining in a number of states. In 2014-15, capacity utilisation improved with the reopening of iron ore mines in Goa and Odisha. The year 2016-17 saw a slight improvement in capacity utilisation to 77 per cent from 74 per cent in 2015-16.
Consolidation on the cards
The capital-intensive steel industry is one of the largest contributors to the banking system’s overall non-performing assets (NPAs). Most of the stressed capacity is now up for sale. With regulators and bankers looking for a quick resolution to these NPAs, it is expected that consolidation will only gather momentum and capacity will now be concentrated with larger players, like Tata Steel and JSW Steel, who have already expressed interest in acquiring these assets. There is also a high possibility of multinational companies entering the Indian steel market by bidding for stressed assets, thereby driving competition. In sum, consolidation bodes well for the overall industry and bankers could expect a moderate haircut than the deep one originally feared.
Domestic steel companies are likely to come under pressure after the hike in iron ore prices by NMDC Limited and private miners in Odisha, which will raise production costs. The move will hurt both large steel majors that do not own captive iron ore mines as well as smaller and medium steel firms that rely on merchant ore supplies to feed their units.
While rising iron ore prices may put the sector under pressure, there are a few factors which bode well for it going forward. The recently announced National Steel Policy, 2017, is expected to provide the much-needed fillip to the industry. In addition, the government’s accelerated spend on infrastructure will create significant demand for steel in the country. The Make in India initiative is also expected to give a fresh boost to steel consumption through defence and shipbuilding.
Further, the government’s move of retaining anti-dumping duties on flat steel products till August 2021 is likely to augur well for the sector. This will provide a floor for Indian steel prices in case global steel prices drop sharply, thereby improving margin visibility and reducing volatility in domestic steel companies’ earnings.
The market outlook for the Indian steel industry is indeed bright with the gradual increase in global prices and, therefore, the debt restructuring process by banks is likely to create abundant opportunities for investors, both in the country and overseas.
With inputs from a presentation by Anjani K. Agrawal, Partner and Global Industry Leader, Steel and Metals, National Leader, Mining and Metals, EY, at a recent India Infrastructure conference.