The Demonetization Doldrums
From being a measure, a step, demonetization has become an issue, a crisis. The doldrums following demonetization is a major factor that will decide the course of the Indian steel industry in the new year. Sales, purchases, demand & supply, logistics, production – everything has been affected. The situation is expected to drag into the first quarter of FY18 before normalizing. Industry experts opine that demonetization will slower the pace of steel growth in India. The overall consumption will decline due to degraded purchasing power. Even as big players are coming up with new capacities in the coming year, the pace of growth will slow because of reduced demand.
Standard & Poor’s credit rating for India stands at BBB- with stable outlook. Moody’s credit rating for India was last set at Baa3 with positive outlook. Fitch’s credit rating for India was last reported at BBB- with stable outlook.
The Unbridled Steel Export from China
If you recall, early in 2016 President Xi Jinping touted a ‘normal growth rate’ for China. With the steel industry being at the core of the advocated premise, China made promises of cuts in steel production capacities, reduced coal mining and tightened environmental norms. And these promises were, in fact, fulfilled; albeit in a manner of circumvention. For instance, though China cut down 45 mnt of its production capacity, most of those capacities were idle to begin with. Also, even as iron ore mining reduced domestically, import was bullish and reached 1 billion tonne. Steel production in China in 2016 is expected to be 808 mnt, 5% higher than 804 mnt production in 2015.
Amid all this, China saw a host of protective measures slapped against its steel exports from India, Europe, USA and others. While Beijing condemned such measures, it didn’t wince because of them. Chinese steel exports are expected to be 112 mnt in 2016, decreasing a mere 0.8% from 113 mnt in 2015.
Steel exports from China are not expected to take a step back in 2017 either. Industry opinion is that the cheap Chinese exports will further pressurize the global steel prices.
The FTA Conundrum
Furthering relationship with neighbors could cost India a domestic discontent. The steel industry is apprehensive about its fate in the coming year as India is committed to reduce the import duty on steel from Korea to nil by January 2017 under the Comprehensive Economic Partnership Agreement (CEPA). Under a similar binding, import duty on steel from Japan is reduced to 0.8%; that from Korea at present is 0.63%. Imports from China attract a duty of 12.5%.
Together, Korea and Japan have about 70 mnt of excess capacity that is dependent on exports. Since the CEPAs came into effect – Indo-Korea in January 2010 and Indo Japan in February 2011, steel imports from these two nations increased significantly. Imports increased from 23% during 2009-10 to 43% in 2015- 2016. These two countries follow China as the top steel exporters in the world.
While demonetization continues to bat down the industry amid low demand and consumption, eroding margins and severely low capacity utilization, following the norms of the CEPAs will add to the struggles of the industry. If a decision is made to the contrary, as urged by the steel ministry to the commerce ministry, 2017 could prove to be a year of a major trade shift where global steel exports are concerned.
The Budding Scrap Destinations
The South East Asian countries are becoming increasingly prominent as ferrous scrap importers. Vietnam’s scrap imports until Oct’16 have surpassed that of CY 2015. Vietnam imported 3.19 mnt of scrap in 2015. Its imports in 2016 until October reached 3.21 mnt. A high duty on import of billets from China has also pushed up scrap imports significantly. Similarly, duty on billet imports in Bangladesh has routed scrap towards the country. In Indonesia, scrap use has increased after the government put a cap on domestic steel use in projects to boost consumption. South Korea too has imported 5.15 mnt scrap until November in 2016, against 5.09 mnt in CY 2015.
While Turkey, India, EU are the traditional markets for scrap, the South East Asian countries look promising destinations in 2017.
The Consolidation Propensity
News of mergers and acquisitions dotted 2016 here and there. In the latest instance, Tata Steel acquiring BRPL for INR 9,000 million is the talk of the town. Brahmani River Pellets Ltd (BRPL), which had a turnover of INR 4,520 million in 2015-16, owns a 4 mnt pa capacity pellet plant in Jajpur and a 4.7 mnt iron ore beneficiation plant in Barbil, Odisha. A 220-km slurry pipeline connects the pellet plant with the beneficiation plant. The acquisition announcement was made on 23rd December and will take another 4 months to finalize all approvals.
“The acquisition provides an upstream integration opportunity to Tata Steel to meet its metallic requirements and improving the feed mix for its Kalinganagar steel plant and Jamshedpur steel plant”, Tata Steel said in a statement.
On 1st December 2016, China Baowu Steel Group Corp was launched in Shanghai. The company, formed from the merger of Shanghai Baosteel Group Corp and Wuhan Iron & Steel Group, is now the world’s second-largest steelmaker, just behind ArcelorMittal. The two companies have a capacity of more than 70 million tonnes. The merger is aimed in line with the Chinese government’s strategy of improving efficiency and reducing competition and overcapacity. This strategic restructuring is being seen as a beginning of more such mergers in the country.
With the capacities going obsolete and fresh investments bearing too much risk, consolidations and mergers could bring a turnaround to the industry. 2017 could be a year of the much needed restructuring of the global steel industry.
The Rise of Trump
Donald Trump coming to power is something the world is still getting adjusted to. The concerns of the US steel industry formed the core of the presidential debates. Trump in his campaigns promised to bring back the heyday of the American steel industry. His stance on strict measures on import of steel and inclination towards backing the US coal industry has got everyone shifting in their seats. Trump plans big infrastructure spending, USD 1 trillion at least to take up consumption, as per reports. However, Trump’s anticipated pro- steel policies are yet being looked at by economists worldwide with a vague foreboding. While Trump has aggressively been advocating domestic steel use in construction sector, he has been known to have a tendency of using imported steel in his own buildings. Also, if imports are contained and steel prices hiked domestically, another sector such as automobile could put forth pleas with reference to their struggles in situation of high steel prices and inability to import certain grades of steel required by them. With Trump being termed ‘fickle’ by the media, it wouldn’t be unjustified to second guess his stance towards the steel industry later on.
The stones will set rolling once Trump takes the oath to office on 20th January. Much in the steel industry could depend on Trump in 2017.
Source: Steel 360 Magazine Jan’17 Issue