After almost a decade of indifferent growth, the recovery of the global economy and that of the steel industry in 2017 points to a positive outlook for India’s steel sector. Economic growth is contingent upon the growth of the steel industry as it is used in most of the economic activities; in cars and construction products, refrigerators and washing machines, cargo ships and surgical scalpels. India has seen its steel industry growing at tandem with its economic growth – from just one million tonne (mt) in 1947, the production capacity grew to 130 mt in 2017-18.
India becomes the second largest steel maker in the world
Surpassing Japan, India has now become the second largest steel maker in the world. With China on top, India had been holding the number three slot for the third year in a row till 2017. A steady rise in production to 96.92 mt during January- November 2018 compared with Japan’s 95.86 mt made India’s production the second highest globally. While China is miles ahead of others in terms of production – 831.70 mt in 2017 – the gap between Japan and India was narrowing down in the past few years. Japan produced 104.7 mt steel in 2017 compared with India’s 101.4 mt.
In 2017-18, crude steel production in India is estimated at 102.34 MT, with the total crude steel production growing at a CAGR of 5.4% over the last seven years. The steel sector contributes over 2% to the GDP of the nation and provides an estimated 20 lakh direct and indirect jobs. 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.
The higher growth in steel production is attributed largely to policies undertaken by the government followed by a host of steps taken to curb imports, push local demand through initiatives like ‘Make in India’, implementation of GST and announcement of a number of infrastructure projects.
India’s ascent to the second spot, however, has not come as a surprise. 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 at least 5.5% to 6% every year, tracking strong GDP growth of 7.3% to 7.5%.
According to Moody’s, Indian steel producers have marginal direct exposure to the US market and even their indirect exposure may also be limited, given most of their sales are to domestic automotive, construction and manufacturing companies. This makes Indian companies largely immune to the global trade war.
Steel majors gain from rising steel demand
With minimal new steel capacity expected to be commissioned until 2021 in India, robust steel demand – especially from the construction, infrastructure and automotive sectors – will keep end-product prices high, even as rising costs for key inputs, coking coal and iron ore, pressure profitability.
Meanwhile, India's steel sector consolidation will drive improvement in the industry’s capacity utilisation levels and mute the pressure on profitability.
This is immensely reflected in the financial performance of the Indian steel majors. Tata Steel posted its highest quarterly profit in nine years at Rs. 3,116 crore in the second quarter of 2018-19, aided by strong product prices and robust performance of its India business. The company’s first half profit jumped more than three-folds from Rs. 1,800 crore in 2017-18 to Rs. 5,586 crore now. Total earnings during the same period have increased by 20%. The earnings were the result of the company’s move to sharpen its focus on the Indian market where demand for the metal was robust because of strong activity in the infrastructure space.
The turnaround of the steel sector, which saw financial stress resulting into loan defaults and even bankruptcies, followed by insolvency-driven buyout attempts by global giants as well as by existing promoters only recently, has largely been achieved due to a rising demand followed by an increase in unit price realisation. The industry is witnessing a consolidation of players which has led to investment from other sectors. The ongoing consolidation also presents an opportunity to global players to enter the Indian market. Indian metallurgical industries attracted foreign direct investments to the tune of $10.84 billion in the period April 2000–June 2018.
National Steel Policy 2017
For a smooth growth of the steel sector, the Indian government announced a new steel policy in 2017 that envisions investment of Rs. 10 lakh crore to build more production capacity. The policy has planned for a steel demand of about 230 mt by 2030-31 based on higher spending on infrastructure and construction through 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 ore (lumps and fines) to ensure smooth supply to the domestic industry. Huge scope for growth is offered by India’s comparatively low per capita steel consumption and the expected rise in consumption can be linked to increased infrastructure construction and the thriving automobile and railways sectors.
Backed by growing demand, other steel majors like JSW, SAIL and Jindal Steel too have earned record profits in the first half of the current year. JSW’s net profit has increased more than three and a half times while SAIL and Jindal Steel, which incurred a net loss in the first half of last year, have both earned substantial profit.
India’s per capita steel consumption rises
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. Allocation to infrastructure was raised by more than Rs. 1 lakh crore for financial year 2018-19 as the government looked to aid the economic recovery after the twin shocks of demonetisation and the implementation of GST. Total expenditure on infrastructure for 2018-19 stood at Rs. 5.97 lakh crore compared to the Rs. 4.94 lakh crore revised estimate for 2017-18.
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 latest Economic Survey said.
The infrastructure sector accounts for about 9% of steel consumption and expected to increase to 11% by 2025-26 according to the 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.
Steel consumption in rural India too is rising. Per capita consumption of finished steel in rural India is expected to increase from 12.11 kg now to 14 kg by 2020. Policies like Food for Work Programme (FWP), Indira AwaasYojana, Pradhan Mantri Gram Sadak Yojana would drive the demand for steel in the rural sector according to this report.
That steel industry is growing at a higher rate is a big relief for India’s policy makers, but the fact remains that despite the growth, the industry is suffering from a number of problems. For example, the capacity utilisation of the sector is very low. Worse, it declined sharply in recent years – down from 81% in 2014-15 to 76% in 2016-17. Shortage of metallurgical coal is another problem. Many steel plants are forced to import metallurgical coal. The biggest problem of the sector is stressed assets that have led to a number of steel companies to face bankruptcy proceedings followed by insolvency - driven buyouts.