Turnaround is around the corner

The governmentÂ’s sincere attempts to expedite the project clearance of the stalled projects and participation by the private entrepreneurs in PPP projects in infrastructure would lead to enhancement of steel consumption in 2013-14.

Our Experts:
B Satish Kumar, Managing Director, Steel Exchange of India
Sushim Banerjee, Director General, INSDAG

On the back of a slowdown, Indian steel consumption decreased drastically. How do you view this situation? Will there be any correction in the near term?

Kumar
The domestic raw steel production declined to 1.858 million tonne (mt), the highest level in the past few months. There was an unassuming downward swing in most of the major steel-producing regions of the world, continuing the relatively weak start to 2013 for the global steel industry. Due to the current global and domestic economic slowdown, there was a slump in the business confidence and production activities in the current fiscal. Steel production in India has grown steadily in the last decades and is likely to continue to expand as domestic producers are increasing their capacity utilisation to meet the projected demand by the government. The only sizable gains last month were in China. The current economic situation prevalent in the country is also one of the reasons for the decrease in steel consumption. Like all industries, the steel sector too has faced the brunt of the sluggish economy. However, the situation seems to be changing of late. The year 2013 has started off well for the steel sector and we have reasons to believe that the turnaround is just around the corner.

Banerjee
Indian steel consumption has grown by around 3.5 per cent during 2012-13, which is lower than the level envisaged at the beginning of the year. A number of factors are responsible for the decline in steel consumption in the country in 2012-13. One of the major reasons relates to the subdued growth in the steel intensive sectors like infrastructure, machinery and equipment sector and consumer durables including automobile production. The decline in growth rate of consumer durable (2.7 per cent during first eleven months of the last fiscal) and a marginal growth of 1.2 per cent in the automobile production in 2012-13 has impacted adversely the demand for the flat product. A number of mega projects in power, oil & gas, steel, mining, and cement has been stalled due to problems relating to environment and forest clearances, movement restriction of raw materials, and ban on mining activities in Karnataka and Goa.

It is expected that the government would urgently take sincere attempts to expedite the project clearance of the stalled projects and initiate action on commencing of the new projects for which the Cabinet Committee on Investment (CCI) has been formed. This along with participation by the private entrepreneurs in PPP projects in infrastructure would lead to enhancement of steel consumption to around 7-8 per cent in 2013-14.

How far regulatory issues, moderation in industrial activity and hardening interest rates impacted the industry?

Kumar
The steel sector in India has been facing a difficult time over the last few years on account of poor monsoon coupled with the domestic economic slowdown. This has led to a decline in demand for steel from the sectors like construction, capital goods and automobile. Regulatory issues, moderation in industrial activity and hardening interest rates too have adversely impacted the growth of the industry. Hike in interest rates has meant that funds were not easily available to the industry. This, in turn, has hurt the expansion plans of steel players. However, we expect domestic steel consumption to improve over the next few months on the back of recent reforms by the government towards the manufacturing sector.

Banerjee
All the reasons mentioned above are responsible for capping the rate of growth of steel consumption under 4 per cent in 2012-13. Despite the huge anticipation in the market, the Reserve Bank of India could reduce the repo rate by only 25 basis points in the last quarter of 2012-13 (RBI has just had another round of cut in repo rate by 25 basis points). The high interest rates have made the cost of capital and particularly the borrowing rate quite high and this has impacted adversely the demand for consumer good including passenger cars, two-wheelers and real estate, which are linked with personal and housing loans. The mandatory rigidity has led banks to become extra cautious in existing credit for industrial activity. This has particularly impacted the demand for steel.

Will large capacity additions create a supply overhang?

Kumar
The capacity utilisation of the steel industry was much lower than the average capacity utilisation of 88 per cent for the past five years. Capacity declined due to decrease in availability of iron ore, increase in installed capacity, and slowdown in demand. The decrease in the availability of iron ore and sluggish demand also led to moderation in industrial activity. These factors have resulted in the domestic industry witnessing a capacity utilisation of around 79 per cent.

Banerjee
Almost all the big steel producers have undertaken brown field expansion, which would fructify from the second/third quarter of 2013-14. As is the norm in all capital intensive projects, the first year would see a minimum addition in level of production. While large part of the fresh capacity should replace the high imports in flat products, there is a likelihood that subdued industrial activity in shipbuilding and machinery and equipment sector may lead to marginal over capacity in steel plates.

Is lack of domestic raw material hampering business of non-integrated players? How are these players thinking alternative ways?

Kumar
Non-integrated players have been considerably affected by the lack of availability of key raw materials. Despite international iron ore prices declining, the domestic prices saw a sharp rise due to the lack of availability. Low production in Karnataka and Odisha led to a major cut in domestic iron ore production, which in order affected the operations of many non-integrated steel players. The situation not only hampered the capacity utilisation of various steel players, but also led to significant increase in the price of iron ore in the domestic market, as delivery for lump ore was restricted, which further forced some steelmakers to import ore.

Banerjee
The business of non-integrated players having no captive sources of mines is indeed challenging under the current scenario. However, the recent Supreme Court order on opening of mines (under A and B category) in Karnataka is likely to soften the iron ore market in the state and facilitate supply of iron ore in the country. The import of non-coking coal to serve the needs of sponge iron producers would continue. The heavy import of melting scrap to the extent of around 7.8 million tonne in 2012-13 may lead to a change in the charge-mix by the non-integrated steel players but at a higher cost.

Will cheaper steel imports create more pressure on domestic companies?

Kumar
The enormous import of low-priced steel has created more obstacles for domestic steel procedures which are currently facing high supply. As the steel prices have reduced to low levels leading to an increase in import, the steel is sold at prices much lower than domestic products, affecting the local manufacturers. The country only needs few tonnes of steel, but imported figures have climbed to hundreds of thousands of tonnes. The government must take steps to control the substance of imported steel, purpose of the imports and labelling regulations to protect local producers.

Banerjee
Cheaper steel import has always adversely affected the margin of the domestic players. In 2012-13, total import of saleable steel reached a level of 8.6 million tonne which is 13.6 per cent more compared to the previous year. Taking advantage of the low import duty (around 3 per cent against the normal duty level of 7.5 per cent) cold rolled sheets/coils was imported at a record level of 1.9 million tonne primarily from South Korea and Japan under Free Trade Agreement (FTA). A large component of seconds/defective steel in CR, GP/GC, electrical steel sheets and tinplate are leading to quality down gradation in the domestic market apart from putting downward pressure on the domestic prices.