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India’s steel industry is on the border of another crisis. The persistent economic slowdown is threatening the industry with a demand deceleration followed by a price fall to put pressure on margins. This is despite the fact that the industry has so far witnessed a steady output growth.

The index of steel output has grown by 6.7% in the first eight months, during April-October of 2019-20 against an increase of 3.3% in the same period of last year. This is significant for economic growth and contingent upon the growth of the steel industry as it is used in every aspect of economic activities; in cars and construction products, refrigerators and washing machines, cargo ships and surgical scalpels. It can be recycled over and over again without loss of property. A better performance of the steel sector amid a general economic deceleration thus, gives hope of revival.

The story so far is encouraging but the question is: How long can the steel sector maintain its growth trend against the economic slowdown caused mainly by a rapid deceleration in industrial output? The sale of automobiles, the production of capital goods and the construction of residential as well as office spaces – which are the major consumers of steel - have all declined. The sale of passenger vehicles declined by 16.4% in April-December 2019 over the same period last year. Sale of commercial vehicles has declined by 21.1% during the same period. The production of capital goods and that of infrastructure/construction goods has declined by 11.6% and by 2.7%, respectively, during April-November 2019 against the same period a year ago.

India is now the world’s second biggest steel maker

The economic slowdown is feared to cut steel demand and compel steel companies to prune production affecting India’s global ranking in steel production.  Backed by steady increase in capacity and production over the past years, India has replaced Japan as the world's second largest steel producing country in 2018. India's crude steel production in 2018 was estimated at 106.5 million tonnes (MT) against 104.3 MT of Japan. Crude steel production grew at 3.67% annually compounded, from 88.979 MT in 2013-14 to 106.575 MT in 2018-19. The production of total finished steel including non-alloy and alloy/stainless was estimated at 131.57 MT last year – up by 33% from 99.38 MT in 2013-14. The crude steel manufacturing output of India is expected to increase to 128.6 MT by 2021, accelerating the country’s share of global steel production from 5.4% in 2017 to 7.7% by 2021.

India has witnessed its steel industry growing in tandem with the economic growth – from just one million in 1947 the production capacity has grown to 137.98 MT in 2018-19. The steel sector’s contribution to the overall GDP of the country was more than 2% in 2018. The total exposure of the industry was estimated at about `3.13 lakh crore. The sector provides employment to an estimated five lakh people directly and another 25 lakh indirectly. According to a report released in 2019 by Oxford Economics, the steel industry employs 6.1 million people globally. For every two direct jobs in the steel sector, 13 more jobs are created throughout its supply chain. Some 40.5 million people work within the steel industry’s global supply chain.

The growth in steel production was largely attributed to a policy push of the government backed by a buoyant economy that demanded more steel in every passing year. Be it, the automobile makers, the realty sector, the engineering industry or infrastructure, every sector needed more steel to support their growth trends. Steps taken to curb imports and to push local demand through various initiatives, implementation of GST and announcement of a number of infrastructure projects helped the sector to perform better. At the other end, measures taken to curtail steel imports have substantially reduced import in recent years-import was down to 7.83 MT in 2018-19 from as high as 11.71 MT three years ago in 2015-16.

India’s ascendance to the second spot, however, did not come as a surprise, for, the country was closing the gap with Japan for the last three years. In fact, Moody's Investors Service announced last year that India will be the brightest spot for the steel sector in 2019. The report said that India’s steel consumption is rising by at least 5.5% to 6% every year.

According to Moody’s report, Indian steel producers have marginal direct exposure to the US market and even their indirect exposure may also be limited, given that most of their sales are to the domestic infrastructure sector, automobile industry and manufacturing companies. This makes Indian companies largely immune to the global trade war.

Moody’s was right as Indian steel had a good year in 2018-19. But things have changed since then with India’s GDP slumping down from one low to another in 2019-20. The sector has done well so far but its future performance would depend on how the economy behaves in the coming months.

India slated to become world’s second largest steel consumer

After becoming the second biggest producer, the country is slated to surpass the US to become the world’s second largest steel consumer. Aggregate steel consumption has grown by about 32% in the last five years from 74.10 MT in 2013-14 to 97.54 MT in 2018-19. According to Indian Steel Association, the steel demand is expected to grow by over 7% in both 2019-20 and 2020-21.

Accepting the fact that the key to higher steel consumption would mean larger infrastructure spending, the government has increased allocation on infrastructure substantially in the last Budget. The government has also announced to invest `100 lakh crore in infrastructure over the next five years.

This is just a miniscule of what is required to be spent on infrastructure. India will need to spend about $ 4.5 trillion in the next 25 years for infrastructure development of which it will be able to garner about $ 3.9 trillion, the Economic Survey said. 

The infrastructure sector accounts for about 9% of steel consumption and is expected to increase to 11% by 2025-26 according to Indian Steel Association’s latest report. Estimated steel consumption in airport building is likely to grow by more than 20% over the next few years. The automotive industry, another big user of steel, is projected to grow in size from about $ 74 billion in 2015 to $260-300 billion by 2026.

To add to it, steel consumption in rural India too is rising. Per capita consumption of finished steel in rural India is expected to increase substantially in the coming years. The government’s ongoing policies such as Food for Work Programme (FWP), Indira Awaas Yojana and Pradhan Mantri Gram Sadak Yojana are expected to drive the demand for steel in the rural sector.

Theoretically, these policies along with government’s promises to spend a large amount on the infrastructure sector would drive the demand for steel in the country. But will the fund-crunched government be able to spend the promised amount on infrastructure? Government’s own statistics show that between April 1, 2019 and January 15, 2020 direct tax collections have declined by 6.1% over the same period of the previous year.

After two good years steel majors face pressure on margins

With no new steel capacity in 2019 and minimal capacity expected to be commissioned until 2021, steel demand – especially from the construction and infrastructure sectors – was expected to keep end-product prices high, even as rising costs for key inputs, coking coal and iron ore put pressure on profitability.

Riding high on higher demand, steel majors did well financially during last two years. Tata Steel increased its net profit by more than two and a half times in 2018-19 over the previous year. Net profit of JSW Steel increased by 78% last year while SAIL earned a net profit of `2,179 crore in 2018-19 against a loss of `482 crore in the previous year. And if Jindal Power was still in red, it brought down the loss substantially in 2018-19.

But that was last year. With the beginning of 2019-20, the demand for steel has slumped. Moderation in steel demand is largely attributable to weakness in automobile and construction sectors. India’s steel demand grew at 5% in the first half of this fiscal, lower than the 7.5% and 7.9% growth seen in FY2019 and FY2018 respectively.

This has resulted in a sharp fall in steel prices. Domestic steel prices in India have fallen to a 34-month low in October due to a persistent demand slump from automobile and construction industries. According to ICRA, the difference between domestic and imported prices has widened in recent months with the domestic prices trading at a discount lowering the unit price realisation of the domestic steel makers. This has affected the finances of the Indian steel companies badly in the current year. Their net sales have declined as also has net margins.

The slump in steel demand and its negative impact on steel prices have seriously affected the finances of steel companies. The turnover and net margins of each of the four top steel makers have declined in the first half of 2019-20 against the same period of the previous year.

National Steel Policy 2017

For a smooth growth of the steel sector, the government announced a new steel policy in 2017 that envisions investment of `10 lakh crore to build more production capacity. The policy has planned for a steel demand of about 230 million tonnes by 2030-31 through higher spending on infrastructure and construction by government initiatives to push steel demand and increase utilisation.

The new policy mandates to give preference to domestically manufactured iron and steel products and will be applicable on all government tenders. The policy projects crude steel capacity of 300 MT and production of 255 MT by 2030-31. An export duty of 30% has been levied on iron to ensure smooth supply to domestic industry. Huge scope for growth is offered by India’s comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors. To protect the interest of the domestic steel makers, the government has come out with a policy last May to give preference to domestically manufactured iron and steel products. The policy mandates to provide preference to domestic products in government procurement. The policy provides preference to domestically manufactured iron and steel products valued at `50 crore or more in government procurement.

Higher infrastructure spending would hold the key to the well-being of the sector.