India is the third largest steel producer in the world after China and Japan and has an installed capacity of about 131 million tonne (mt) at present. It produced 101 mt of steel in FY2017 and consumed 84 mt during the same period. However, as compared to the per capita steel consumption of China and Japan of about 493 kg each in CY2016, India's per capital steel consumption remains significantly lower at 63 kg, hinting at a favourable demand potential for steel in medium-to long-term. This article aims to provide insights into India's consumption and production patterns, the global scenario in steel and the recent developments in the domestic steel sector.
India's steel consumption growth, which used to remain in high single digit percentages before FY2012, witnessed a consistent decline till FY2014 to reach a multi-year low level of 0.6 per cent on account of subdued demand from key end-user industries like construction, capital goods and automobile sectors, which together account for about 80 per cent of domestic steel use. Steel demand growth somewhat recovered in FY2015 and FY2016 before falling again to an anaemic rate of 2.6 per cent in FY2017 due to persistent low demand from these end-user industries. However, domestic steel consumption growth improved in the current year, and is expected to go to 4.3 per cent in H1 FY2018 on account of sustained buoyancy in the auto sector and a mild pick up in construction activities, notwithstanding the lull in the capital goods sector. ICRA believes that the government's thrust on affordable housing, roads, railways, transmission lines and solar power generation, along with continued demand from the auto sector, is likely to result in an uptick in demand in H2 FY2018 and would keep the consumption growth higher than the previous years' levels.
Domestic steel production witnessed major challenges in FY2015 and FY2016 due to the onslaught of cheaper imports, which grew by 71 and 26 per cent respectively to reach 9.3 mt and 11.7 mt levels, which also turned India into a net importer of steel during the said years. However, to protect domestic steelmakers from cheaper imports, the government took a series of measures such as consecutive hikes in import duty in June and August 2015, 20 per cent safeguard duty (SGD) in September 2015, minimum import price (MIP) imposition in February 2016, provisional anti-dumping duties (ADD) in August 2016 and definitive anti-dumping duties in May 2017 for five years. As a result, India's steel production, which contracted by 1.9 per cent in FY2016, witnessed a sharp growth of 10.7 per cent in FY2017, which was also supported by a spurt in steel exports due to buoyant international prices during the year.
Domestic steel production growth is expected to moderate to 5.1 per cent during H1 FY2018 from 10.7 per cent in FY2017, in line with the anticipated moderation in export growth to 60 per cent in H1 FY2018 from 102 per cent in FY2017. However, the growth in steel production still remains higher than the growth in demand. Also, production by large integrated steel producers is likely to continue to report a healthy growth of 9.8 per cent in H1 FY2018 compared to a 6.3 per cent negative growth in steel production by secondary steel producers. Given the buoyant international prices since June 2017, steel exports are likely to remain high in the near term, which along with improved domestic demand and prices would support domestic steel production in the coming months.
China's resilient demand-and-supply
China is a dominant force in the global steel industry as it produces almost half of the total steel produced in the world and its share in global steel consumption is nearly 45 per cent. China also accounted for over 90 per cent of the incremental global production in the last 10 years. During CY2016, China and India were the only major steel producing countries in the world that registered a growth in steel production.
The real estate sector is one of the largest consumers of steel in China with a share of about 35 to 40 per cent. After falling to 1 per cent in CY2015, real estate investments have significantly picked up with growths of 6.9 per cent in CY2016 and 7.9 per cent in 8MCY2017. Sale of commercial buildings also grew at healthy double-digit levels in CY2016 and in the current year, despite witnessing some moderation in the current year. After real estate, infrastructure is the second largest consumer of steel in China, with a share of about 20 per cent. Given the Chinese Government's announced plans for transportation infrastructure and municipal projects, infrastructure investment is likely to remain robust in the near term.
China's steel exports in CY2015 touched an all-time high of 112 mt, a number which is higher than the annual steel production of some of the large steel producing nations, including Japan and India. Exports continued unabated in CY2016 as well and stood at 109 mt. However, due to remedial measures in trade taken in different parts of the world, including the European Union, the US and India, China's exports have reduced to 48 mt in 7MCY2017 and is unlikely to touch the previous-year highs anytime soon.
Along with improved demand, capacity cuts implemented by China since February 2016 have also resulted in a recovery in steel prices. In February 2016, China announced that it plans to cut its steel capacity by 150 mt in the next five years. In January 2017, it made one more announcement of cut down low-grade induction furnaces of an aggregate capacity of about 90 to 100 mt by June 2017. Out of the 50 mt capacity cuts envisaged for the current year, China has already cut 85 per cent of the steel capacity in the first half. China's supply-side reforms are likely to continue in the coming months with the country planning output cuts of as much as 50 per cent during the winter months in its biggest steelmaking province, Hebei, to curb pollution. As a result, the export prices of the Chinese hot-rolled coil (HRC), a benchmark for international steel prices, have risen by 40 per cent in September 2017 since mid-May 2017.
In India, domestic HRC prices remained firm at Rs 38,750/mt during April 2017 but dropped by 9 per cent by the end of May 2017 on account of weak domestic demand conditions, a situation which persisted in June 2017. However, prices recovered to Rs 39,250/mt by the third week of August 2017 and rose further to Rs 40,750/mt in the second week of September, in line with the uptrend in international prices and some pick up in domestic demand. Since the landed prices of imports are well above the notified prices under ADD (US$ 489/mt) and SGD (US$ 500/mt) framework, these duties do not kick in at current elevated international prices; however, they do provide a floor to domestic prices in the event of a price correction internationally. After the price hikes in September 2017, the domestic HRC prices are still cheaper than the landed cost of Chinese imports by about US$ 10/mt, indicating a small headroom to increase prices in the near term.
Recent insolvency proceedings
Steel manufacturing is a capital-intensive business with investment of about US$ 1.0 billion required to set up a greenfield integrated steel plant of 1.0 mt capacity per annum. Most of the domestic steelmakers had embarked on largely-debt-funded capital expansions during the period FY2011 to FY2016, which coincided with the down cycle in the industry in FY2015 and FY2016, when India witnessed an unprecedented jump in cheap imports and international steel prices corrected sharply by the global oversupply situation. This had caused significant financial strain on the balance sheets of most of the domestic steel makers and adversely impacted their debt-servicing ability, which in turn led to a build-up of stressed assets in the financial system.
In a bid to resolve the stressed-asset problem, in June 2017, the Reserve Bank of India had identified top-12 stressed companies, accounting for 25 per cent of the gross non-performing assets (NPA) of the banking system for a resolution through the Insolvency and Bankruptcy Code, 2016 (IBC). Among these 12 companies, five are from the steel sector, which accounted for around 17 per cent of the current domestic installed capacity and over Rs 1.5 lakh crore of gross bank credit. Reportedly, some of these assets have already attracted attention from foreign investors, given the long-term India growth story. ICRA believes that stronger domestic steel players with healthy financial profile also remain potential investors for such assets, which could result in industry consolidation going forward, and benefit the industry in the medium to long term.
- Jayanta Ray, Senior Vice President and Group Head, Corporate Ratings, ICRA Ltd