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?
Post unlocking of economy there has been a strong V-shaped recovery in domestic steel demand which had remained depressed during the lockdown period. A pick up in domestic demand from the infrastructure activities, pipe and tubes manufacturing, automobiles and consumer durables sector ahead of the festive season has led to increased steel consumption and higher restocking demand. Demand from two-wheelers, tractors and passenger vehicle segments improved significantly which increased demand for flat steel products mainly produced by the large integrated steel players. Steel consumption grew by 96% in September 2020 quarter compared to June 2020 quarter. Consumption of steel also fell by 11.4% y-o-y in September 2020 quarter, much lower than 52% y-o-y fall registered in the preceding June quarter. We expect steel consumption to remain steady going forward in H2FY21. During the first half of FY21, steel consumption fell by 31% compared to corresponding period in FY20. During the H2FY21 we expect steel production to be in the range of 52-55 million tonnes, which gives us 14-17% fall in steel consumption in FY21 compared to FY20.
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?
While demand from the automobiles and consumer goods segment is expected to continue to rise going into FY22 bulk of the demand for steel comes from the construction and infrastructure segments. Centre and State governments funded road development, metro rail development, renewable energy and affordable housing projects are slowly getting back on track as the problem of migrant labourers is resolved and monsoon recedes. The government’s decision to allocate additional budget of Rs.25,000 crore (over and above the Rs 4.13 lakh crore announced in budget FY21) towards strengthening infrastructure and to domestically produce capital equipment is expected to boost steel demand. As per the government’s ambitious ‘National Infrastructure Pipeline’ (NIP) project, the central and state government’s infrastructure investments in FY21 is expected to be around Rs.19.5 lakh crs which would generate demand for steel. Infrastructure development is crucial for growth of steel demand and consumption.
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?
Given the difficult circumstances due to the Covid-19 pandemic, the government has taken number of measures both monetary and fiscal to revive the economy and propel demand. One such measure has been the “Atmanirbhar Bharat” scheme which aims to restrict import of certain type of steel products which can be sourced domestically. The government had also announced many infrastructure and construction projects which aim to boost steel demand. However, the key factor would be the execution of these projects in timely manner which has been slow to take off. The government can also do more to lift the real estate and infrastructure sector, which contributes 62% and accounts for bulk of India’s steel demand. The government may look at providing some relief to the secondary steel players who have been the hardest hit by the pandemic. The newly auctioned iron ore mines with merchant miners needs to start operating to meet the domestic demand and bring down the cost of raw material for secondary players. Export of iron ore when there is supply shortage in the domestic market increases steelmaking cost of domestic secondary steel players who do not have captive mines. Channelizing the resources efficiently is very important for the overall growth of the industry in the long-run.
The steel industry is going through a consolidation phase. How beneficial is this for the growth of the steel sector?
The acquisitions of insolvent companies by stronger players will bring improvement in capacity utilization of the stressed assets which were otherwise operating at sub-optimal levels due to financial constraints. Consolidation has helped some companies to gain backward linkages for their raw materials security while it has allowed others to gain a stronger hold of the domestic market by enhancing their product portfolio and opportunity to expand in different market. Some companies that desired to enter the Indian market were able to do so. We expect market competiveness to improve going forward. Consolidation has also brought debt levels of the industry to sustainable level.
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
Despite being the world’s second largest steel producer India’s export as a percentage of total finished steel production has not improved much and has remained just 6-9% during FY17-20. This is because of lower export realisations as compared to domestic prices. It is not profitable for domestic steel companies to export as high taxes and freight cost makes Indian steel uncompetitive globally. The National Steel Policy, 2017, envisages that by 2030–31, India will export 24 million tonnes of steel annually and imports will be nil. This is possible only when production cost is rationalised. Indian steel industry is increasing production of value added products which fetches better margin but the share of value added products in total is currently very low at around 10-12%.
What are the challenges faced by the industry?
High taxes, logistic cost, raw material and energy cost as compared to competitor countries are some of the major challenges facing Indian steel industry. Indian steel companies have a cost disadvantage of $80-100 per tonne as compared to their counterparts due to the taxes and duties levied. The cost of steel production in India is around $320 – $340 per tonne in comparison with $400 per ton in China and Japan, whereas the global average is around $390 per tonne.
Indian steel manufacturers have to pay 18% GST on iron and steel apart from 5% tax on logistics and further 2.5% import duty on coking coal, 5% import duty on met coal, high electricity tariffs, Rs 400 per tonne cess on domestic coal and royalty on captive mines. The royalty on iron ore at 15% is one of the highest in the world, whereas the global average is in the range of 3-7%. Such levies either do not exist or are comparatively lower in competitor countries making Indian steel uncompetitive.
The government may look at reducing these taxes which would create a level playing field for domestic industry. Export incentive must be enhanced to make Indian steel more competitive in the international market. China provides 13% rebate on export which gives a huge fillip to Chinese steel exporters. Electricity cost in China is also heavily subsidised.The borrowing cost in India is also significantly high compared to its competitor, China. Indian manufacturers pay around 12-15% bank lending rates annually, the highest among the emerging market economies. Many steel companies faced bankruptcy proceedings in 2018 because of which the financial sector has become wary of lending to the steel sector. Getting access to finance at reasonable rates by steel companies, especially the secondary small scale producers is difficult. The government should improve efficiency parameters to bring down the cost of production.
Capex creation has been low across sectors mostly as companies prefer to buy existing companies rather than build a greenfield project. Major reason for this in delay in getting regulatory approvals and land clearances. The government may look at addressing these issues as undertaking of more greenfield projects will generate demand for steel.
How receptive is the Indian steel sector to Digitization, IoT, Robotic process automation (RPA), Automation, Artificial Intelligence, data analytics? Has the industry benefited by adopting these technologies?
Only a few large integrated steel companies have adopted advanced digital technologies while majority still follows the traditional business model with exception being in the areas of supply chain management and operations. The industry has been slow at adopting advance digital technologies.
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?
The government in June 2020 imposed anti-dumping duty on imports of certain value-added steel products from China, Vietnam and Korea for a period of five years with a view to safeguard domestic manufacturers from cheap imports from these countries. Anti-dumping duty in the past has helped to curb dumping of cheap steel products often at below market price into the Indian market. These measures are expected to keep imports in check.
