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The year 2020 has begun on a high note for the steel industry as green shoots of a revival become increasingly visible. With an increased infrastructure spend from the government and automobile industry gaining momentum, the steel industry is likely to regain traction.
Steel is one commodity that can reflect the strength of an economy as it has a wider impact in both backward and forward directions. Indian steel market, though, lost considerable pace during 2019 as compared to its robust performance in 2018. In the global market, China still retains global top ranking, but India escalated to the second position by pipping Japan to the third position. Of the total global production of 1808.6 million tonnes (MT) of steel, 51 per cent comes from China which is 928.3 MT. India's steel output is around 106.5 MT and Japan produced 104.3 MT of steel in 2018.
Being at the top of the ladder raises the level of benchmarking. In terms of competitiveness and product quality, Indian steel is acceptable in the international market. While the quality is competitive enough, the Indian steel segment is fighting the odds because of the ripple effect of the current global economic situation. Construction, including infrastructure and real estate, and automotive sectors are the major demand drivers of the steel industry. The housing and construction sector is the largest consumer of steel today, using more than 50 per cent of the steel produced.
The year 2019 witnessed a decline in demand for steel as a result of the low demand from global markets. According to the World Steel Association, the demand from developed countries declined.
As per the data available from the World Steel Association, world crude steel production was 147.8 MT in November 2019, one per cent less than in November 2018. China's crude steel production in November 2019 was 80.3 MT, an increase of 4 per cent over November 2018. India produced a measly 8.9 MT in November 2019, down 2.8 per cent against November 2018.
However, in the first week of December last year, while attributing to a government research body news agency Reuters had reported that China's 2020 crude steel output was expected to drop. It, however, pointed out that China's crude steel output in 2020 is expected to ease from a record high of 981 MT this year.
OUTLOOK FOR DOMESTIC STEEL
Domestically, India's steel industry had a roller-coaster ride. The production declined 2.9 per cent in November YoY and 1.8 per cent MoM. India produced 9.1 MT of crude steel in October 2019, down 3.4 per cent in comparison to October 2018. In September 2019, India produced 9.0 MT of crude steel up 1.6 per cent against September 2018.
India's steel production took a hit starting from October 2019. India Ratings and Research (Ind-Ra), a Fitch company, in its Steel Mid-year Outlook had revised its outlook on the steel sector to stable-to-negative. The available data substantiates the rating revision.
According to Ind-Ra, "The outlook on steel has been revised from stable to negative for the remainder of FY2020 given sluggish steel demand growth expectations owing to mix of structural and cyclical concerns in end-user sectors, primarily auto and real estate construction. Hence, Ind-Ra has revised its FY20 steel demand growth expectations downwards to around 4 per cent from the previous forecast of 7 per cent. It was 8 per cent in FY2019.
The outlook also factors in increased import risks, especially from the Free Trade Agreement (FTA) countries such as Japan and South Korea due to adverse domino impact of the slowing global growth and continuing trade frictions. Furthermore, raw material availability and price risks may escalate in the fourth quarter of FY2020 if the uncertainty over iron ore mine auctions gets prolonged.
Steel prices have been continuously softening while raw material cost prices have only seen partial declines, thereby squeezing the gross spreads for steel producers. Domestically, the decline in industrial demand directly affected the steel industry.
HIGH INPUT COSTS
The domestic industry has a set of challenges that hinder production. Although the decline witnessed in production was because of the direct impact of the global economic slump, there still are a series of challenges being faced by steel manufacturers in India.
Sourcing of raw material, coking coal, royalty payments by the small producers, finance, lack of technology, etc. add to the concerns raised by the industry players. The cost of manufacturing steel products in India is comparatively higher than in other countries. This is attributed to the higher cost factors involved in the production starting from coking coal as a fuel. Iron ore and coking coal are two critical elements of steel production.
India is heavily dependent on imports for coking coal. The variations in international pricing, factors affecting the overseas mines, policy or regulatory changes in the countries of those coal mines are elements that hurt Indian steel producers. Reports suggest that the dip in India's steel output may decline further in the coming months due to the decline in imports of coking coal.
As per the latest data available, the coking coal imports declined 14.52 per cent to 3.61MT in November 2019 as against 4.22 MT in the same month the previous year. Until November 2019 India imported 44.09 MT, which is 5.11 per cent lower than the corresponding period of 2018 where it recorded an import of 46.46 MT.
Bhagyashree Bhati, Deputy Manager Industry Research, CARE Ratings said, "Non-availability of such important materials is an issue. We have high trade charges for importing and exporting of goods. Not only that, transporting coal from one state to other costs a lot. This issue directly reflects on the cost of manufacturing. For a large player with an integrated supply and manufacturing unit, the impact is less. However, it remains an issue for small producers as they depend on the other chain of supplies. And that's not all! There is a problem of royalty when it comes to coal and iron ore. Higher royalty charges are also a point of concern."
Bhagyashree pointed out, "We do have to pay fare, taxes and duty on all materials. This is a problem in the steel industry. The cost of production of steel in India for steel is high compared to other countries, so these fares and taxes play a major role. The government is looking at bringing out a white paper on how to reduce the tax burden on the steel sector. It may provide some solution or discuss the issue in the coming months."
In simple words, the price of domestic steel is benchmarked against global pricing. So, international factors have a significant impact on the movement of pricing. When the international prices move up and down, domestic steel prices vary, similarly. However, the domestic market witnessed a slight movement in prices recently. There was an increase of Rs 1,500-1,750/t on the backdrop of demand surge from across sectors and global demand. This is the highest price hike this fiscal. In the current fiscal, steel prices had been falling consistently since April and touched a low of Rs 32,500/t in September from the peak of Rs 45,000/t last year.
Globally, too, steel prices have gone up by USD90-100, which also might have reflected on the Indian proving.
IMPROVING PER CAPITA CONSUMPTION
The growth rate of steel industry primarily depends on the demand from the infrastructure, automobile and real estate segments. Per capita consumption also plays an equal and crucial role. According to the World Steel Association, globally, the average per capita use of steel had steadily increased from 150 kg in 2001 to 224.5 kg in 2018. With the growth in population, it is projected that by 2050, the use of steel will increase 1.5 times than the present levels.
Bhagyashree signed off by saying, "Recovery can only be expected, but the good news is that steel prices have improved by Rs.1000/t because the international prices have moved up. It is difficult to say what we can expect in the next five years. If we want to become a USD5 trillion economy, then the infrastructure has to go to quite a great high. Only when they do something for the infrastructure sector can you expect the economy to move towards the target."
However, Ind-Ra expects steel demand to recover in the second half of FY2020, supported by a pickup in government investments, fiscal stimulus measures, improvement in market sentiment and a lower base in the corresponding period last year. The agency believes limited new capacity additions in FY2020 will help balance the demand-supply situation amid sluggish demand during the period. Steel producers are likely to see a moderation in cash flows from operations as healthy margins moderate over FY2020 from the highs of FY2019. Large integrated players should continue to have adequate liquidity supported by their sound market access and high financial flexibility, despite moderating profitability pressures, ongoing challenges in market liquidity and increased risk perception among investors. Overall, it can be assumed that the steel sector is finally showing the first signs of a revival. And this recovery is mainly on account of the initiatives by the government to boost spending on infrastructure, construction and restocking activities by the automotive sectors.
- LIZA V