After relaxation in lockdown guidelines it seems the steel sector is going through an upswing phase, what is your current take on the steel sector? How will be demand offtake in the remaining quarter of the current financial year?
Ind-Ra expects yoy de-growth in consumption to be around 18%-19% pa in FY21 largely due to loss of volume in 1Q21 due to lockdown. While 1QFY21, recorded lower offtake due to the lockdown measures, 2QFY21 has shown significant increase of around 90% qoq though remaining 10.7% lower yoy, most of the large steel manufacturers’ output has been on par with pre-Covid-19 levels in September 2020. Such manufacturers with an increased value-added sales mix benefited from a growing downstream demand from the auto and white goods sectors due to pent-up demand, preference for personal mobility and the upcoming festive season. However, secondary steel players which largely manufacture long products are yet to ramp-up output to pre-Covid-19 levels. While rural construction demand improved due to government spends, demand from infrastructure projects is yet to pick up due to monsoon season but likely to pick up in 2HFY21. In case of any reduction in demand from the auto and white goods sectors post festive season with consumers postponing consumer discretionary expenses, it is likely to be offset by the demand from construction and infrastructure projects as they gradually pick-up in 2HFY21. Accordingly, demand is likely to sustain over the remaining quarters of the current financial year.
What is your assessment for the next financial year 2021-22 for the steel sector? Where will the maximum demand for the industry come from?
FY22 demand growth is likely to be high at around 20% on a yoy basis which will be on back of lower base effect and gradual pickup in demand from key end-user sectors. Domestic steel demand will largely remain reliant on the infrastructure, construction, real estate auto & pipes sectors which together account for around 65%-70% of the domestic demand. While the government has announced an Rs.100 trillion infrastructure investment plan till FY25, there has been minimal investment made thus far with the focus being largely on rural spends in the current Covid-19 context. The front loading of infrastructure investment would assist in ensuring quicker demand recovery.
Production and consumption of steel are widely regarded as an indicator of economic progress. The progress of the steel sector depends on government policies and projects. How can the government hand-hold the industry to propel the sector?
The regulatory response for steel sector has been commendable. The import threats have largely been addressed with anti-dumping duty in place on imports. Further, the anti-dumping duty imposed on imports of galvanized and galvalume steel products from China, Korea and Japan had provided a boost to domestic players. The Steel Ministry’s quality and price monitoring teams keep a close watch on imports. The ‘Make in India’ campaign and mandate to use Indian made steel by PSUs shall lend support to the domestic industry in troubled times. The Rs.1.5 lacs crore infra budget FY20-25 should create strong demand for steel. While there currently is a surplus scenario, it is likely to reverse into a deficit scenario in FY23. Currently steel industry is also impacted by limited availability of key raw material iron ore due to delay in ramp up of auctioned mines in Odisha by new lessees, proper monitoring of progress and resolution of roadblocks so as to restore supply will be key for the sector.
The steel industry is going through a consolidation phase. How beneficial is this for the growth of the steel sector?
The flat products segment has largely been consolidated. However, the long products segment could see some consolidation as some of the players in liquidity crunch may find it difficult to start operating again. While large players would look to gradually increase their share in the long products market which is still largely unorganized and fragmented, their balance sheets are currently highly leveraged given their previous acquisitions and current capex schedules. As their leverage gradually reduces, they could look to increase their long products market share through both brown field expansion and bolt-on acquisitions.
Consolidation of large stressed mills mainly into production of flat steel products are mostly completed and has started operation barring one or two which are facing legal hurdle and are likely to be resolved in near term. However, some of the mid to small sized players mainly into manufacturing of long products facing liquidity crunch may be acquired by healthy players. Acquisition of assets by large/healthy players have resulted in turnaround of the loss making plants operating at low capacity utilization and dumping products at lower prices to keep operation running. The change of hands for good assets with weak players will result in maintaining of required supply of quality steel in domestic market which would otherwise been replaced by imports.
Though Indian steel industry has shown tremendous progress, the latest being JSPL’s contribution in manufacturing world-class rails for high-speed trains including bullet trains, it still has a long way to go to flood the world market. Your take on this
When the pandemic hit us, Indian players were able to ship intermediary products in export markets primarily to China. Indian mill are low cost mills and as such can export at competitive prices. Western world is looking at producing ESG compliant steel or green steel which increases the costs substantially. There is a lot of scope to produce high end-steel in India and there were the technology tie-up helps. JSW steel has linkages with JFE Ltd (japan) and Arcelor Mittal with Nippon. Indian mills have been spending constantly into technology improvement which will result into development of high grade steel requirement of domestic demand replacing imports and then can also be exported.
How does the remedial ‘anti-dumping duty’ imposed by the government for cheap import of steel benefits / affects India steel sector in the long run?
Post imposition of Anti-dumping duty (ADD) by government on imports of cheap steel in FY16 the industry has been able to improve profitability and invest into upgradation or investment of new capacity so as to make India self dependent on steel requirement. The spread between the raw material and finished product has increased significantly. During the period of cheap imports into India many steel companies have suffered losses and had turned into bad asset had government intervention not been there many more would have followed. The imposition of ADD has provided support to steel industry to grow and invest, timely review and action of the provision will be key monitorable. Further Indian steel industry will also have to gradually step up in cost efficiency by reducing specific energy consumption, improving coke rate, etc, to be competitive in global market in due course without ADD protection.
