A turnaround in the domestic steel industry after the government’s policy interventions has held up hope. Buoyed by the resurgence, India is now aiming to hit the second spot, globally, in crude steel production and churn out products for international markets. China and Japan are today the top producers in steel and, the Indian steel industry has a long trek to cover to catch up with these giants.
Data from the World Steel Association says the global crude steel output in 2016 (as on December 20) has totaled 1467 million tonne (mnt). Of this, China has half of the production share with 738 mnt. Japan with 96 mnt steel output is placed ahead of India where steel production stood at 87 mnt. The positive takeaway for India is that while global steel production contracted 0.1 per cent in the first 10 months of 2016, India registered 6.8 per cent growth in output, higher than any steel producing country.
A report by Moody’s Investor Service further corroborates India’s steel revival story. India is the only area of strength with rising demand and protectionist measures in place even as it forecasts a negative outlook for other Asian steel makers as lower profitability would dent earnings. In India, policy cushions in the form of minimum import prices and anti dumping duties is set to support the domestic steel makers. The country now accounts for eight per cent of all steel produced in Asia.
There are projections that India may dislodge Japan as the second largest steel maker in 2017 as the latter’s production dwindles. But the key question that needs attention here – is this short-term rally for the domestic steel players or is actually sustainable?
Two crucial areas of concern here for the steel makers to sustain the momentum are demand for steel products and pricing of key ingredients like iron ore and coking coal. Both factors will play a decisive role in how things pan out for the steel industry in the future.
Demand Momentum Needs to Hang on
A demand boost within the country is needed to absorb the production growth in steel. This demand can be fuelled by some massive investments in roads, rail and shipping network, urban development, rural infrastructure, minor and major ports, Sagarmala project, dedicated freight corridor, affordable housing for all and smart cities. This is where the steel ministry has to wrest the initiative to make availability of steel for smooth implementation of critical infrastructure projects. And, the triggers are positive.
Indian steel demand till the end of October grew three per cent and the cheer came from exports as well that spiked 42 per cent. Imports are down year-on-year by 40 per cent. A scale of substitution of imports by indigenous products has augured well for the steel industry which until the beginning of this fiscal was rattled by spate of cheaper imports from China, Japan and Korea.
Short-term demand, though, seems to be stifled by the demonetization blow. This has particularly impacted the construction sector and steel companies are already staring at tapering off-take. The worry here is the timing of recovery of the construction sector as the demand for long steel products like TMT bars, low end sections and structures has suffered.
Input Prices Still a Pain in the Neck
Expanding steel output can be sustainable only when finished products prices stay competitive. Iron ore and coking coal being the two commodities of influence in steel need to be watched out for. Iron ore prices in worldwide sea borne trade have touched multi-year highs of USD 82 per tonne. The consoling fact for the steel makers closer home is the surplus availability of iron ore as production is in the upswing. But, high logistics costs pose a challenge. Coking coal prices have also gone through the roof, breaching USD 300 per tonne mark. Indian steel players being largely dependent on imported coking coal supplies have already felt the impact of soaring prices on their bottom-line. Coking coal imports of Australian origin at the current price level is a confirmed threat to blast furnace based steel operators. One of the workable strategies to overcome this challenge is to encourage Coal India to go for massive blending and washing facilities to bring down the high ash content in domestically sourced coal. Till the time this is achieved, volatility in coking coal trade is bound to exert pricing pressure in the domestic market. And, passing on the extra cost to the end customer may not be feasible on each occasion.
Focus on Niche Segments as Duty Protection is Temporary
A protectionist environment in the shape of MIP and import duties has injected relief to the steel industry. But, players may realize the protection is not for a prolonged period. Implications of free market trade are already showing up in the way Japan is a dragging India to WTO. Indian government being a signatory to free trade agreements and economic partnerships with Asia Pacific countries also knows it has to take a call on lifting the protectionist measures. Capacity augmentation aside, steel makers got to target the niche segments in emerging areas. Light weight high performance steel with applications in construction, defence, automobiles, railways and aircraft is gaining currency and it needs to be tapped. A shift in game plan with a focus on such emerging applications will help impart cost effectiveness to fresh capacity creation and also make Indian steel products competitive in global trade.
Source: Steel 360 Magazine Jan’17 Issue