Though battered by Covid-19 lockdown, the steel industry has bounced back and is showing signs of green shots. To keep up with the growth trajectory the industry requires strong support from the government and integration of emerging technologies.
Consumption of Steel is an important indicator of economic development of the country. More the consumption of steel betters the health the economy of the country. “Steel has been one of the core drivers of industrialization and has historically held a dominant position. As a raw material and intermediate product for downstream industry production and consumption of steel are widely regarded as indicators of economic progress. Thus, it would not be an overstatement to say that the steel industry has always been at the forefront of industrial development and forms the backbone of any economy,” says Dr Bhaskar Chatterjee, Secretary-General, Indian Steel Association. “Production and consumption of steel is directly related to infrastructure and Industrial activity of a nation. Therefore, it is an important and apt indicator of progress and health of economic activity,” says Brij Mohan Beriwala, CMD, SRMB Srijan. The steel sector contributes nearly 2% to country's GDP and employs over 6 lakh people. “Today, the steel industry contributes slightly more than 2% to the GDP of India. This percentage accounts for direct contribution. The indirect contribution of steel is much larger, owing to the dependence of other sectors. The steel industry employs nearly half a million people directly and two million people indirectly. The output effect of steel on Indian economy is approximately 1.4x with an employment multiplier of 6.8x. As per the World Steel Association, globally, for every two jobs created in the steel industry, 13 more jobs are created across the supply chain,” says Dr Bhaskar Chatterjee.
Rising from the Pandemic
Like all the industries that were affected by Covid-19 induced lockdown, the steel industry too went into downward spiral during the lockdown but bounced back after the lockdown was lifted. According to data released by Joint Plan Committee (JPC), domestic steel production fell by a record 69.5% y-o-y in April 2020 as per provisional figures. The country produced a mere 2.8 million tonne of crude steel during the month. Steel demand contracted by 91% y-o-y in April 2020 with end user industries' like auto, real estate and infrastructure that constitute 80% of demand, coming to a virtual standstill. Though steel was classified as an essential commodity and permitted to operate during the lockdown period production was impacted due to sharp fall in demand from construction & infrastructure, real estate and automobile industry. However, with the partial lifting of lockdown in May demand started to recover. “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,” says Rashmi Rawat, Dy. Manager – Industry Research, CARE Ratings. Giving a detailed break-up of production and consumption of steel post partial lockdown, Dr Bhaskar Chatterjee says, “The domestic finished steel consumption in India has shown sign of recovery in the past few months and has come close to pre-Covid-19 levels largely due to an increase in demand from certain sectors.The finished steel consumption in India increased from around 1 MT (million tonnes) from April, 2020 to 7.9 MT in September 2020. In line with the consumption, the crude steel production has also been improving, following a decline from 9 MT in 2019 to 3.1 MT in April 2020. Since then the production grew at a compounded monthly growth of 22 percent and reached to 8.6 MT in September 2020 and was down by just 2 percent Y-o-Y, supported by higher exports,” says Dr Bhaskar Chatterjee. “While 1QFY21, recorded lower offtake due to the lockdown measures, 2QFY21 has shown significant increase of around 90% q-o-q though remaining 10.7% lower y-o-y, most of the large steel manufacturers’ output has been on par with pre-Covid-19 levels in September 2020,” says Rahul Prithiani, Director, CRISIL Research.
Overcoming Challenges
The government is well aware of the importance of steel industry for the development of India’s infrastructure. Time and again, the government has come to the rescue of India steel manufacturers by imposing ‘Anti-dumping duty’ on steel imports. The latest being imposition of anti-dumping duty on imports of certain type of steel products from China, Vietnam and Korea for five years. The duty imposed is in the range of USD 13.07 per tonne to USD 173.1 per tonne on imports of 'Flat rolled product of steel, plated or coated with alloy of Aluminium and Zinc' from these three countries. The duty was imposed after the Commerce Ministry's investigation arm Directorate General of Trade Remedies (DGTR), in its probe, concluded that the product was exported to India by these countries below its associated normal value, which resulted in dumping and in turn impacting domestic players.“Steel industry has always played critical role in achieving the vision of ‘Atmanirbhar Bharat’. In fact steel is one of the few sectors wherein within few decades of post independence India achieved self sufficiency to a major extent of our domestic requirement. Therefore, protecting the interest of this key sector is a must for our country,” says Brij Mohan Beriwala. Indian Steel Association (ISA) which is engaged with steel associations of other countries for the issues of mutual interest, such as China Iron & Steel Association (CISA), Korea Iron and Steel Association (KOSA), Vietnam Steel Association (VSA) and The Japan Iron and Steel Federation (JISF) too believes imposition of anti dumping duty is good for the country. “India’s domestic steel industry is especially vulnerable to cheaper imports and demand fluctuation. The imposition of anti-dumping duty specifically on the imports of steel products from China, Indonesia, Ukraine, Vietnam, Japan and Korea will help domestic producers in the long run to achieve increase its market share in the domestic market and will also give an impetus to campaign ‘Vocal for Local’ a call given by Narendra Modi, Prime Minister of India,” says Dr Bhaskar Chatterjee. China has strongly emerged as an international leader in steel industry. It has taken over mines rich in iron ores in many countries. It has either taken over steel plants or have gone for greenfield expansion in many parts of the world. With its superior technology, China is able to mass produce finished steel products at a much cheaper price, which are latter on dumped into countries such as India where huge infrastructure work are in progress. This hurts the domestic steel manufacturers who are deprived of huge funds for modernization of their steel plants. Anti-dumping duties give a level playing field for the domestic steel manufacturers. “Anti-dumping duties imposed by the government have certainly helped increase steel demand and have also kept domestic prices competitive against imported steel prices by a few thousand rupees per tonne, depending on the product. The government’s restrictions need to continue in order to keep China, which has 10 times the steel production capacity of our country and lower costs, off the fence,” says BalKrishnaPiparaiya, Senior Director-Ratings, Brickwork Ratings.
Steel industry being high-capital intensive with increase business risk and high fiscal deficit, banks are reluctant to lend capital to steel manufacturers. Furthermore, in India, the interest cost on loan is much higher compare to other developing countries resulting in heavy burden for the borrower. Moreover, steel demand is cyclical. So, during a downturn, the return on investments gets eroded. “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,” says Rashmi Rawat.
Steel industry being a labour intensive sector requires skilled manpower for growth. Unfortunately, there is dearth of skilled manpower in steel industry. According to a study, India needs to increase its labour productivity growth to 7-8 percent to achieve a GDP growth rate of 9 percent. The per capital labour productivity in India is at 90-100 tonnes for steel industry, whereas it is 600-700 tonnes per person in Korea, Japan, and other steel producing nations.The industry today faces its biggest challenge in transporting raw materials - iron ore, coals, coking coal – from mines to manufacturing plants. Again, from the manufacturing plants the finished steel has to be transported to market places. Railways is the preferred mode of transportation as transporting through roadways is economically unviable. “Managing direct costs particularly raw material and freight. High freight costs, impacted by increasing diesel prices, constitute a challenge to manage, particularly when the Indian steel industry is majorly dependent on road transport, which is the most expensive among water, rail and road transport. One tonne of steel produced requires three times the volume of raw material to be transported, which again involves the cost of transporting the heavy-weight finished product. Thus, managing this cost is very important, particularly in new capacities and expansions,” says BalKrishna Piparaiya.
Compare to its competitor countries India has a disadvantage of high taxation right from mining to the finished products by the government. According to a study, the steel industry contributes 8% to the overall GST. There is an 18% tax rate on the iron and steel industry,5% import duty on metallurgical coke and the 2.5% duty on coking coal.“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 tone 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 subsidized,” says Rashmi Rawat. High taxes have made Indian steel non-competitive even before it leaves the plants. To make domestic steel a strong player in the world market. India needs to reduce taxes. “India will never be able to increase steel exports beyond a certain limit and will continue to be threatened by cheaper imports. To prevent this, the government needs to ensure that the additional burden of USD 80–100 that Indian steel makers are saddled with is offset. Removal of non-creditable taxes, duties and cess is the easiest to achieve this. Otherwise, we foresee this to be a big challenge going forward. Apart from this the government need to ensure faster implementation of the Remission of Duties and Taxes on Exported Products (RoDTEP) which will replace the existing Merchandise Exports from India Scheme (MEIS) to encourage the exports of steel and other products,” says Dr Bhaskar Chatterjee.
Government initiatives – A helping hand
The government is well aware of the challenges faced by the industry. To reduce the tax burden the steel ministry with help of NITI Aayog and other ministries concerned will come out with a white paper focusing on lessening the burden of taxes, cess and other duties on the local steel industry, besides studying the global models. The Indian steel industry need to adopt to latest technologies such as IoT, robotics process automation, big data & advanced analytics, mobility and AI to stay ahead in competition curve. “The industry is receptive, but penetration in automation is low, and the transition is slow, more so in the unorganised and SME segments, which accounts for a third of the existing production capacities. The benefits are not yet visible fully and may come through in future. The new production capacities to come up at a large scale during the next decade are expected to dovetail automation and the above technologies in the manufacturing processes right from the planning phase,” says BalKrishnaPiparaiya. As far as demand for steel in domestic market, there are plenty of opportunities. The are plenty of infrastructure projects - Pradhan Mantri AwasYojna, Housing for All, Sardar Patel Urban Housing Mission, 100 Smart Cities Mission (by 2022), Pradhan Mantri Gram SadakYojna, Urban Infrastructure Development Scheme for Small & Medium Towns (UIDSSMT), National Heritage City Development and Augmentation Yojana (HRIDAY), Bharatmala Project, Sagarmala Project, Dedicated Freight Corridor, 24x7 Power for All initiative (by 2019), Development of Industrial Corridors & National Investment & Manufacturing Zones, 75,000 MW Clean-Energy initiative (by 2022) – in pipeline. “The government had also announced many infrastructure and construction projects which will help boost the steel consumption in the near future. However, in order to increase steel consumption, the government should promote use of steel in all sectors/projects, specifically in the construction sector. The government must lay more focus on the construction sector. The construction sector in India that includes physical infrastructure (excluding railways) and real estate, contributes roughly 61% of India’s steel use or steel demand. Use of steel should be encouraged in projects keeping in to view life cycle cost of Steel over other materials. Most of the steel industry experts believe that although the central and state government has announced many infrastructure projects but the execution of most of them has remained slow as equivalent liquidity has not been pumped in,” says Dr Bhaskar Chatterjee.
“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,” says Rashmi Rawat.
Though in the immediate future, festive season will give a push, but to hit the pre-Covid 19 level the industry needs execution of infrastructure, construction and realty projects on a priority.
