On the Cusp

Consolidation among players gathers momentum

The steel sector, one of the country’s core industries, contributes about 2 per cent to GDP. At present, the infrastructure and construction sectors are the biggest consumers of steel, accounting for about 50 per cent of total consumption. The material is used extensively across sectors such as roads and bridges, railways, airports, water, oil and gas, telecommunications, transmission towers, urban metro rail, tunnelling, etc.

The past few years have been tough for the steel industry, with low prices, high level of imports and sluggish demand growth from the infrastructure and housing sectors. Steel producers have not been able to meet their debt obligations, making the sector one of the leading contributors to non-performing loans of banks. The situation has, however, slowly begun to change with increased government support, strong demand from infrastructure and gradual improvements in the global price scenario.

Trends and developments

  • In 2017-18, the total installed capacity of the steel industry stood at 138 million tonnes (mt), recording a year-on-year growth of 7.6 per cent over 2016-17. During the five-year period 2013-14 to 2017-18, production capacity grew at a compound annual growth rate (CAGR) of 8.5 per cent. The capacity, however, has been higher than the offtake of the metal, resulting in underutilisation in the sector. Between 2015-16 and 2017-18, capacity utilisation in the steel industry was in the range of 75-77 per cent.
  • India was the third largest producer of crude steel after China and Japan in 2015, 2016 and 2017. In 2018, India became the second largest producer of steel (106 mt) after China (928 mt) and was followed by Japan (104 mt) and the US (87 mt). During 2018-19 (April-January), crude steel production was 88 mt, an increase of 3.7 per cent over the corresponding period of 2017-18. India was the third largest steel consumer in the world in 2017 after China and the US. It is also the largest producer of sponge iron or direct reduced iron in the world and the third largest finished steel consumer in the world after China and the US.
  • From 2013-14 to 2017-18, the production of finished steel increased from about 87 mt to 127 mt, recording a CAGR of about 9.68 per cent. Steel production witnessed its highest year-on-year growth of 32 per cent during 2016-17, when it also surpassed the 100 mt production mark. This was on account of the imposition of a minimum import price which encouraged steel producers to increase their output. During the April-February period of 2018-19, finished steel production stood at 119.45 mt.
  • India is also the third largest finished steel consumer in the world after China and the US. While consumption has witnessed an upward trend, it still lags behind the production pattern marginally. During the period 2013-14 to 2017-18, consumption of finished steel grew from 74 mt to 91 mt, a CAGR of 5.19 per cent. During the April-January period of 2018-19, finished steel consumption stood at 80 mt, an increase of 7.8 per cent over the corresponding period of 2017-18. Per capita consumption of finished steel in 2017-18 was 68.9 kg vis-à-vis 65.2 kg in 2016-17.
  • In a major development, the Ministry of Steel has stopped classifying steel producers as integrated, primary and secondary steel producers. This has been done to provide a level playing field to steel manufacturers, both small- and medium-sized enterprises and large players, with different capacities and following different methods of steel production.
  • The industry is clearly dominated by the private sector. The public sector’s share in total finished steel production has been declining over the years and stood at 19 per cent in 2017-18 (37 per cent in 2004-05).
  • In terms of capacity, JSW Steel, Steel Authority of India Limited (SAIL), Tata Steel and Essar Steel dominate the sector, accounting for nearly 42 per cent of the total capacity in 2017-18.
  • India became a net importer of steel during 2018-19, the first time in three years. Imports increased due to higher demand for high quality steel, especially value-added steel, primarily for the auto sector, and high-end electrical steel.
  • During 2017-18, domestic steel prices remained buoyant, rising 18-21 per cent on a year-on-year basis. The increase in prices was on account of a growth in domestic consumption and rising international prices. Besides, higher raw material prices also resulted in a rise in steel prices.
  • On the financial front, the position of steel companies is not very strong. The steel sector is one the highest contributors to the banking system’s non-performing assets. In fact, companies such as Tata Steel, JSW Steel and Vedanta were among the half a dozen companies referred by the Reserve Bank of India to the National Company Law Tribunal (NCLT) in the first list to initiate bankruptcy proceedings.
  • Around 22 mt of annual crude steel capacity was offered for sale during the year. The companies up for sale include Essar Steel, Bhushan Power and Steel, Bhushan Steel, Electrosteel Steels, Monnet Ispat and Energy, and Visa Steel. Tata Steel completed the acquisition of Bhushan Steel after outbidding JSW Steel. The company also took over the steel business of Kolkata-based Usha Martin. Meanwhile, a consortium of JSW Steel and stressed assets investment firm AION Capital acquired Monnet Ispat and Energy.
  • Stressed steel asset acquisition by large operating companies is expected to lead to an increase in sector consolidation, particularly the flat steel market. Due to this, the spread between landed and domestic prices is expected to reduce. In addition, with a few re-rollers being referred to the insolvency tribunal in the second list, these too stand a chance of being acquired.

The way forward

  • The National Steel Policy, 2017, aims to create crude steel capacity of 300 mt, production of 255 mt and a robust finished steel per capita consumption of around 160 kg by 2030-31. The policy covers critical areas such as self-sufficiency in steel production, globally competitive steel manufacturing capabilities, domestic availability of key raw materials at competitive rates, facilitating foreign investment and enhancing domestic steel demand.
  • Apart from increasing demand from infrastructure and construction, rising incomes, urbanisation and the consequent increase in demand for consumer and capital goods is expected to increase the demand for steel. In addition, the Make in India initiative too will continue to give an impetus to key end use sectors.
  • So far, the lack of domestic product development capabilities has led to imports of most value-added products such as automotive steel, electrical steel (cold rolled grain oriented steel and amorphous steel), and special steel and alloys for power equipment, aerospace, defence and nuclear applications.
  • Expenditure on research and development (R&D) is quite low in the Indian steel industry, at an average of 0.05-0.5 per cent of annual turnover of companies. The situation is, however, expected to change with the government taking a number of initiatives to promote innovation and new technologies in the steel sector. The Ministry of Steel launched an institutional mechanism – the Steel Research and Technology Mission of India – in April 2015 that aims to increase investment in R&D to the international average of 1-2 per cent. Steel public sector undertakings SAIL and Rashtriya Ispat Nigam Limited spent a total of Rs 10.17 billion on R&D activity in the three financial years 2015-16 to 2017-18.
  • Regarding the demand and production outlook, a flat demand growth forecast for China in 2019 is expected to keep average international steel prices and thus domestic prices low in 2019-20. Domestic production of the metal is also expected to be low in the near term due to threat from cheaper imports and considerable degrowth in steel exports due to rising global trade tensions. Further, rising iron ore prices may put the sector under pressure. However, there are a few factors which bode well for it going forward.
  • The resolution process of debt-ridden steel companies currently under way at the NCLT will necessitate a marked change in the structure of the industry. Addressing the issue of stressed assets will lead to debt reduction as well as improvements in margins on change of management, thereby reducing sector leverage. Consolidation in the steel sector is expected to drive improvements in capacity utilisation levels and reduce the pressure on profitability.
  • The fact that the country’s per capita steel consumption at 69 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 changing steel usage patterns. Moreover, 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.
  • Going forward, there is a need to ensure adequate and regular supply of raw materials. In the past, issues such as cancellations of iron ore and coal mine allocations, and delays in land acquisition and obtaining environmental clearances have led to slow capacity addition in the sector. Increased logistics and raw material costs have also led to high operating costs for companies. Thus, transportation of steel through coastal shipping, which is a more cost-effective route, needs to be encouraged.
  •  It is hoped that greater focus on the domestic industry coupled with innovations and indigenous R&D will reduce the dependence of infrastructure sectors on imported steel.

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