Like all sector, steel sector too was devasted by the Covid-19 induced lockdown. The partial opening of the lockdown saw construction activities back on its feet which fuelled demand for steel which increased with each passing day.
Consumption of steel in an important indicator to determine the growth of a nation. If we take the month of January 2021, according to World Steel Association India registered a growth of 7.6 percent in crude steel production at 10 million tonnes (MT) in January 2021. Last year for the same month the country produced 9.3 MT crude steel.According to a report by Motilal Oswal Financial Services India's steel consumption grew 9 percent year-on-year and 3 percent month-on-month to 9.97 mt in January 2021.The report further stated This growth has been supported by robust demand from infrastructure and double-digit growth in auto, white goods, and consumer durable. This revival phase of steel industry has brought in windfalls for the steel majors. The Q3 results of major steel producing companies have reported good profit earnings for the quarter ended December 31, 2020.
Reflection of rapid recovery in Q3 Results
In an interview to this publication, Care Ratings analysts stated, "With the increase in realizations corresponding to the rise in steel prices, the major integrated steel players have posted substantial increase in standalone EBIDTA/Tonne during Q3FY21. The secondary players have also picked up in Q3FY21 after a subdued Q1 & Q2FY21. In Q3FY21, the integrated players faced supply shortage due to low inventory levels courtesy strong sales volumes in Q2FY21 and could not keep up with robust demand in Q3FY21 due to which the integrated steel players registered a meagre 0.06% increase in sales volume".
"Strong operating performance in 3QFY21 for steel players was led by strong pent up demand in end user sectors and push from the GoI on infrastructure spending. It was also possible with adequate liquidity support from the banking system coupled with steel producers' capability to manage labour, iron ore availability, port and in land logistics. Strong sector profitabilityhas been led by increase in realization higher than the increase ininput costs were modest except iron ore costs for steel producers with no captive iron ore linkages. Strong cash accruals have been largely used by the industry to deleverage and better prepare their balance sheets for the large capex requirements in the near to medium term," says Rohit Sadaka, Director, India Ratings and Research.
Tata Steel has reported a consolidated net profit of ₹ 4,011 crore for the quarter ended December 31, 2020. The company had posted a loss of ₹ 1,228 crore in the same period a year ago. Sequentially, profit rose 140 per cent. It was ₹ 1,665 core in the September quarter (Q2FY21).Revenue from operations stood at Rs 39,594.09 crore for the period under review, up 11.4 per cent from same period last year.Commenting of the stellar Q3FY21, in a press release, T V Narendran, CEO and Managing Director, Tata Steel mentioned, "the recovery in the global and Indian economy has led to sharp improvement in steel demand in India. We pivoted our deliveries to domestic markets, to cater to the requirements of our local customers by reducing exports. All the segments, especially automotive, have performed extremely well supported by our continuous focus on strong customer relationships, superior distribution network, brands and new product developments".
JSW Steel reported a manifold jump in its consolidated net profit to ₹ 2,669 crore for the December 2020 quarter. The company has clocked a net profit of ₹ 187 crore in the corresponding quarter of the previous financial year. Its total consolidated income during October-December 2020 rose to ₹ 22,006 crore, compared with ₹ 18,182 crore in the year-ago period. The company's total expenses stood at ₹ 18,120 crore, higher as against ₹ 17,719 crore a year ago.
Government owned steel maker SAIL has reported a consolidated net profit of ₹ 1,468 crore for the third quarter ended December 2020, mainly on account of higher income. The company had clocked a net loss of ₹ 343.57 crore during the same quarter a year ago. During October-December, the company's total income jumped to ₹ 19,997.31 crore from ₹ 16,714.87 crore in the year-ago period. Its total expenses stood at ₹ 16,406.81 crore, compared to ₹ 17,312.64 crore a year ago. The company produced 4.37 million tonne (MT) crude steel, registering a growth of 9 percent over the corresponding period last year (CPLY). During the December 2020 quarter, the company produced 4.15 MT of saleable steel, a rise of 6 percent.In a press release SAIL said, "there has been a countrywide turnaround in the overall economic activities after the short pause set in during the pandemic. In sectors like infrastructure, construction, manufacturing and automobiles, which are major steel buyers, there has been a relatively rapid recovery.
Jindal Steel and Power (JSPL) has reported a consolidated net profit after tax (PAT) at ₹ 2,432 crore for the third quarter ended December 31, 2020, on the back of improvement in operating and financial leverage. JSPL had posted net loss of ₹ 257 crore in December quarter of 2019. The consolidated revenue jumped by 40 percent to ₹ 10,534 crore compared to Rs 7,526 crore in Q3 FY20, driven by strong performance in India steel as well as power business. The company's EBITDA surged by 170 percent to ₹ 4,252 crore from ₹ 1,574 crore in the year ago period.
JSPL reported highest-ever steel production volumes during Q3FY21. During October-December quarter, JSPL standalone reported highest-ever steel production volumes (including pig iron) at 1.93 million tonnes (up 20 per cent YoY) and sales of 1.87 million tonnes (up 12 per cent YoY). As domestic demand continued to recover, JSPL raised its sales within India which was reflected in declining share of exports to 21 per cent versus 38 per cent in Q2 FY21.During the same quarter, pellet production increased 3 percent YoY. External sales of pellets, however, reduced to 0.40 million tonnes (down 38 per cent YoY) on higher internal consumption as steel volumes continue to ramp up. Q3 FY21 also saw JSPL becoming India's first private company to get the "Regular Supplier" status from Indian Railways to supply 60kg 880 grade (90UTS) Rails," it said.JSPL in a press release said, "December quarter showed recovery signs for the entire steel industry in India with utilisation levels as well as domestic demand rising month on month. However, steel industry continues to struggle with raw material scarcity amplified by exponential rise in domestic and international iron ore prices".
Jindal Stainless posted a consolidated net profit of ₹ 170 crore for the October-December quarter, registering a year-on-year rise of 229 percent. Net sales volume stood at 250,562 tonnes, growing 5 percent year-on-year. The company reduced its total debt by 24 percent to ₹ 2,765 crore during the first nine months period of the fiscal year 2021."Buoyed by increasing demand in auto, P&T and hollowware sectors, the outlook for the domestic stainless steel market remains strong," Abhyuday Jindal, Managing Director, Jindal Stainless in a press release.
Jindal Stainless (Hisar) posted an over three-fold jump in its consolidated net profit to ₹ 270 crore for the December 2020 quarter. The company had posted a net profit of ₹ 82 crore in the corresponding quarter of last fiscal. Its total income during October-December 2020 increased to ₹ 3,172 crore, against ₹ 2,512 crore in the year-ago period. JSHL's expenses were at ₹ 2,897 crore as against ₹ 2,408 crore a year ago.
Allegation, cartelisation and a steep hike in steel prices
After the lockdown steel prices started to raise and it increased manifold in the October-December 2020 quarter. Union road transport minister Nitin Gadkari raising concerns of the increasing steel prices which will lead to increase in cost of infrastructure and realty project said big players in the steel industry are indulging in cartelisation to jack-up prices. He stated that all players in the steel industry have their own iron mines, and have not hikedlabour wages nor there is increasing in power rate, and wondered how come prices of steel are increasing. "In January 2021, when both iron ore and steel prices were at its peak, NMDC, India's largest iron ore producer and a GoI owned entity had increased iron ore prices [NMDC (0-10mm, Fe64%)] to INR4,810/MT in January 2021, 65% or INR1,900/MT higher on a yoy basis. Simultaneously, flat steel prices [Indian, HRC (Mumbai 2.5mm-8mm, IS2062)] were at INR55,500/MT, 41% or INR16,250/MT higher on a yoy basis. Accordingly, there was a significant cost push. However, the robust steel demand and short supply of steel caused a disproportionate increase in steel prices," says Rohit Sadaka.Domestic prices of hot-rolled (HR) coil, a flat steel product that is further processed and used in transport, construction, shipbuilding and capital goods surged 54% from a year ago in the December quarter amid a robust recovery in domestic demand and mirroring higher global steel prices. Prices of HR coil climbed to Rs. 58,000 a tonne this January from ₹ 36,250 a tonne last June. About this exceptionally high rise in steel prices, Care Ratings analysts states, "the Indian Steel Association (ISA) in its response has cited price rise of raw materials,ie, Iron ore, shortage in global steel supply and lower capacity utilizations due to pandemic induced disruptions as the primary pillars for the elevated steel prices. In response to curb the surge in steel prices, ISA has demanded a temporary ban on iron ore exports. During February 2021, an intermittent decrease in prices led the sentiment of normalcy in end user industry but the same has been thwarted by the jump in steel prices in March 2021 corresponding to the rise in global iron ore and steel prices. The Competition Commission of India (CCI) has reportedly started the investigation to get to the bottom of the allegation of said 'cartelization' and it remains to be seen if the sky-high prices of steel were indeed a manipulation or driven by fundamental factors".
Revoking anti-dumping and countervailing duty and its implications
In the just concluded Union Budget 2021, the finance minister Nirmala Sitharaman has announced a reduction in customs duty on flat steel products to 7.5% from 12.5%, and on long products to 7.5% from 10% earlier, making imports cheaper.After this announced steel prices which were rocketing started to decline. With HR coil prices currently settling below ₹ 56,000 a tonne, analysts at credit rating firm Icra predict a 10% decline in domestic prices from the highs of January as the duty cut would make imports more competitive and, in turn, exert near-term pricing pressures on domestic steelmakers. Steel industry analysts too opines steel prices to fall by as much as 10 percent from their January highs over the next few months,retreating from a runaway rise that led end-consumers to seek government intervention."The reduction in duties will not affect imports from countries like South Korea and Japan, with which India has a free trade agreement (FTA)," said Jayanta Roy, senior vice-president and group head, corporate sector ratings, Icra. "However, imports from China and other non-FTA countries will become more cost-competitive." He further added, "Chinese export HRC prices have seen a 10 percent drop in January on lower domestic demand. Considering the lead time of about two months for imports to arrive, domestic HRC prices could correct by up to 10 percent by end-March to align with global prices and stay competitive in the domestic market".
The domestic steel manufacturers fears that if the temporarily revoked anti-dumping and countervailing duty continued for a longer period it will have an adverse affect on the domestic steel industry. "However, the domestic stainless steel industry will be adversely impacted by the recent announcement in the Union Budget. Suspension and revocation of duties will grant smooth access to Chinese and Indonesian subsidized stainless steel products into the Indian market. This move will not only be detrimental for the organised players, but the MSME sector, which caters to 35% of the total stainless steel demand, would be forced to shut down. We urge the government to review this decision soon as it is against the essence of the 'Atmanirbhar Bharat' mission," says Abhyuday Jindal, Managing Director, Jindal Stainless.
"In the current scenario, domestic steel prices are at high levels but still below the landed import prices and hence the reduced import duty should not put any significant price pressure immediately.However, any significant price fall in the large and oversupplied China steel market could pose material price risks for the Indian steel producers. Also, any further extension of the temporary revocation in steel products would be negative for the credit profile of the steel producers and rollers," says Rohit Sadaka.
The government plans to privatize the government owned steel companies. The first on block is the RashtriyaIspat Nigam Ltd (RINL), the public sector corporate entity of Vizag Steel Plant. The has led to protest by the employees, Andhra Pradesh state government and the opposition. However, according to government privatization will result in infusion of capital for optimum utilization, expansion of capacity, infusion of technology and better management practices, higher production and productivity and expansion of direct and indirect employment opportunities.
Tata Steel will be amalgamating Tata Steel BSL and Bamnipal Steel with itself. BSL, formerly Bhushan Steel was acquired by Tata Steel through bankruptcy resolution process and Bamnipal Steel is a wholly-owned subsidiary of Tata Steel.
Jindal Stainless (Hisar) (JSHL) will be merged into group company Jindal Stainless (JSL). This merger will induce a simplified capital structure, expanding the turnover of the merged business to around Rs 20,000 crore.As per the proposed structure, the mobility business of JSL Lifestyle, a domestic subsidiary of JSHL, would be merged into JSL. Non-mobility businesses would be carved out as a separate new entity, named Jindal Lifestyle. Post-restructuring, Jindal Stainless Steelway (JSSL) and Jindal Lifestyle will operate as Indian subsidiaries, while overseas operational subsidiaries of JSL in Spain and Indonesia will continue to operate as business units of merged JSL.The merger process is expected to be completed in the second half of 2021-22.
Following the acquisition of Adhunik Metaliks and Zion Steel by GFG Alliance, Liberty Steel, a part of GFG Alliance, has restarted the first phase of production at Adhunik Metaliks and Zion Steel. The steel major to revive these newly acquired steel plantswill introduce its GREENSTEEL model of combining steel recycling with low carbon and renewable power sources to create a more sustainable, competitive operation serving local markets.
South Korean steel major POSCO has evinced interest in setting up steel plant in Andhra Pradesh. POSCO has signed a Memorandum of Understanding (MoU) with RashtriyaIspat Nigam (RINL) for the setting up of a steel plant in Andhra Pradesh.
Andhra Pradesh government on Tuesday chose Liberty Steel India Limited as the joint venture partner for construction and development of YSR Steel Plant in Kadapa district. The proposed steel plant will have a capacity of up to three million tonnes per annum for producing high grade steel products.
The Government of Odisha and ArcelorMittal Nippon Steel India have signed a MoU for setting up an Integrated Steel Complex in Kendrapara District. This project will entail in investment of more than Rs. 50,000 crore.
Outlook 2021: No major hiccups
The worst is behind for the steel sector. The devastation caused by Covid-19 and the phoenix like rise of the steel sector exemplifies the spirit of Indian steel sector. The country is witnessing revival in all sector where steels are majorly consumed such as automobile, infrastructure and construction, white goods, realty and agriculture and construction equipment. As the prices stabilize the government will revoke the temporary reduction in customs duty on flat steel products and on long products. With galore of demands for steel from various sectors the demand witnessed in Q3FY21 is likely to sustain.