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Steel: Increasing high prices may hit infra revival

Steel: Increasing high prices may hit infra revival

Devastated by the Covid-19 induced lockdown the steel industry bounced back quickly. During the lockdown the industry adopted technology and modernization to the core. This helped the industry to gain foothold lost during lockdown

Consumption of steel is judged as the important indicator to judge the economic and industrial development of any nation. The amount of steel consumption is considered as the benchmark of development the country is undergoing at that time. India being one of the fastest growing economies in the world at present, the steel sector is of strategic importance to the country. According to India Ratings and Research, India's crude steel output in April 2021 was at 8.3 million tonnes (MnT), 152% year-on-year (yoy) higher, due to the complete COVID19 lockdown in the previous year. India's crude steel output in April 2021 was at 8.3 million tonnes (MnT), 152% year-on-year (yoy) higher, due to the complete Covid19 lockdown in the previous year. The steel sector contributes nearly 2% of the country’s GDP and employs over 20 lakh people. The per capita consumption of total finished steel in the country has risen from 51 kg in 2009-10 to about 61 kg in 2017-18. The Indian steel industry is largely iron-based through the blast furnace (BF) or the direct reduced iron (DRI) route. Indian steel industry is highly consolidated. About 50% of the crude steel capacity is resident with integrated steel producers (ISP).

Scaling new high: Q4

Tata Steel has reported a net profit of Rs 6,593.5 crore for the quarter ended March 2021 as against a net loss of Rs 436.8 crore in the year-ago quarter. The company’s net sales in the quarter surged 49 per cent on-year to Rs 21,202.6 crore aided by strong demand and price hikes. On a consolidated basis, the company reported a net profit of Rs 6,644.2 crore as against a net loss of Rs 1,481.3 crore. The company’s revenue from operations climbed 39 per cent on-year to Rs 49,977.4 crore. “Despite a slow start in the first quarter, we managed to deliver strong performance in India with broad-based, market-leading volume growth supported by our agile business model,” said TV Narendran, Managing Director and Chief Executive Officer, Tata Steel. JSW Steel has reported a 1,717 per cent year-on-year rise in its consolidated net profit to Rs 4,198 crore for the quarter ended March 2021. The quarterly revenue from operations stood at Rs 26,934 crore, up 51 per cent on a year-on-year basis. Government owned steel maker SAIL  posted a 31 per cent jump in its consolidated net profit at Rs 3,469.88 crore for the quarter ended March  2021, mainly on account of higher income. The company had clocked Rs 2,647.52 crore net profit during January-March period of fiscal year 2019-20. The company's total income rose to Rs 23,533.19 crore, from Rs 16,574.71 crore in the year-ago period. On a standalone basis, SAIL's net profit grew to Rs 3,443.80 crore, from Rs 2,725.16 crore in the same period of 2019-20. In a regulatory filing the company informed that the Covid-19 pandemic outbreak and measures to curtail it had caused significant disturbances and slowdown of economic activities, as a result of which the company's operations had to be scaled down during; the first quarter of financial year ended March 31, 2021.  Jindal Steel and Power (JSPL) has reported a consolidated net profit of Rs 1,900.5 crore, a jump of 23 times the net profit registered in the last year same period at Rs 82.13 crore, on the back of better steel prices, reduced interest expense and the company’s sales in the export market. The company’s consolidated revenue from operations has grown by 75 per cent to Rs 11,880.61 crore as against Rs 6,795.18 crore in the same period last year. “Indian prices are $200 less. Last quarter, we did a lot of exports. Exports were worth more than Rs 10,000 crore in FY21. From March 2020 was a washout, after which we did a lot of Exports and even now we have to increase exports,” said V.R.Sharma, Managing Director, JSPL. Jindal Stainless (Hisar) reported an over three-fold jump in its consolidated net profit at Rs 350.65 crore for the quarter ended March 31, 2021, mainly on account of increased income, as against Rs 108.35 crore posted in the same quarter last fiscal. Its total income during the quarter under review rose to Rs 3,128.20 crore from Rs 2,297.94 crore in the year-ago period. For Q4FY21, JSHL reported consolidated EBITDA (earnings before interest, tax, depreciation and amortisation) of Rs 406 crore, up 123 per cent year-on-year (YoY) while the EBITDA margins expanded by 500 bps to 13.1 per cent. Abhyuday Jindal, Managing Director, JSHL  attributed demand recovery, strong operational performance and consistent deleveraging of the balance sheet behind good results during the quarter under review.

High steel prices a concern

After the lockdown steel prices started to raise and it increased manifold. Steel companies have increased prices by up to Rs 5,000 a tonne beginning April while state-owned iron ore producer, NMDC has hiked prices of lump ore by Rs 500 a tonne. Steel producers opined that prices of hot rolled coil – a benchmark for flat steel (used in automobile, domestic appliances and construction) – have been increased by Rs 4,500-5,000 a tonne; prices of long steel (used in infrastructure and construction) have increased by up to Rs 3,000 a tonne. Post-increase, the price of HRC is at Rs 57,600; in longs, TMT is at Rs 52,500. The increase in steel prices is led by a surge in global prices.
Union road transport minister Nitin Gadkari raising concerns of the increasing steel prices said it will lead to increase in cost of infrastructure while the realty players opined that big players in the steel industry are indulging in cartelisation to jack-up prices. The minister felt increase in steel prices in not necessitated as all players in the steel industry have their own iron mines, have not hiked labour wages nor is there increase in power rate.  “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, Director, India Ratings and Research.

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 Rs. 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”.

Safe guard duty and Government initiatives

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 Rs. 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.

Digital and analytics Initiatives

In this Pandemic time each and every sector is leveraging the digitalization and technology to adhere to Covid-19 norms. The steel industry too has introduced digital and analytics in the steel making processes. The digital initiatives taken are identification of the finished product till the end customer through introduction of Quick Response (QR) code based traceable tags where quality and genealogy can be tracked; Centralized Yard Management for all finished products to reduce rake retention time and improved identification and handling of the material with wireless Hand Held Terminal (HHT); Steel Ladle Management System to automatically track the steel ladle through various shops like Laddle Preparation Bay, Converter, secondary metallurgy, caster and back. It is used to monitor ladle circulation time and effective heat loss in empty ladle. This system facilitates regulating the steel bath tapping temperature at LD to get optimum casting temperature at caster using Level-1 and Level-2 automation; SMS Grade Prediction System to predict Final (Tundish) Composition and Final Grade based on Converter Analysis and Ladle Furnace Additions using Machine Learning Algorithm; Optimisation of Coke, Pellet & Sinter quality to improve the yield & throughput of the Blast Furnaces; Modeling of iron making process inside a Blast Furnace to reduce coke consumption and further enhance the yield; Optimisation of casting speed in the Continuous Casting process to arrive at the target properties at the lowest cost and time; Operation Research based models to optimize logistics cost and improving yield by efficient production planning; and adoption of Industry 4.0 technology in the steel sector for improving manufacturing processes, material usage, energy efficiency, plant & worker productivity, supply-chain and product life-cycle. In addition to these, the Ministry of Steel has come up with “Promotion of Research & Development in Iron & Steel Sector” scheme which provides for grant of financial assistance to various institutions including CSIR laboratories and academic institutions for carrying out research in the iron & steel sector including environmental issues like utilisation of wastes, improvement in energy efficiency and reduction in GHG emission.

Smooth Ride Ahead

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.




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