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Turning the corner

Protectionist measures by the government seem to have revived the domestic steel industry but Japan and China may play spoilsport by dragging India to the WTO.
By Sumant Banerji | Print Edition: July 31, 2016
[Photo: Ajay Thakuri]

In the past six months, desperation and anxiety have been replaced by a sense of relief and cautious optimism in the boardrooms of Indian steel companies. After a relentless surge for well over two years, steel imports declined for the third straight month this May. High imports were a result of overcapacity in the global market led largely by China. It resulted in a steep decline in the profitability of the domestic industry, which was unable to compete with the price at which steel was coming into the country.

The government, to its credit, was quick to act, though it was a tad late in realising the extent of the problem. A host of measures - including a safeguard duty and a minimum import price (MIP) - has restored a semblance of normalcy. Yet, these same measures are now being questioned in multilateral forums. Given that India is keen to project itself as an open economy that welcomes foreign investment - foreign direct investment (FDI) benchmarks were relaxed in many sectors on June 20 - a protectionist stance in steel will not go down well. The search is on for a middle ground.

Hoping for a Turnaround

Not all ills can be blamed on imports from China, Japan or Korea, but they matter nonetheless. Imports of steel grew by a staggering 71 per cent in 2014/15 and continued almost unabated for at least the first half of 2015/16. At the same time, the prices of imports also fell sharply. From the pre global recession highs of 2008/09 when a tonne of hot rolled coil was being imported at the docks in Mumbai for $744 (Rs 36,000 then), prices crashed to below $300 (Rs 19,000) last year - a 12-year low.

This brought down prices in the domestic market as well, which declined from Rs 37,200 per tonne in November 2014 to under Rs 27,000 in January 2016 - resulting in lower net realisation and squeezed profit margins for steel companies. The worst period was between October and December 2015 when the industry logged a cumulative net loss of Rs 6,317 crore and a net margin of -20.11 per cent. Barring exceptions like Tata Steel, every company was incurring a loss on each tonne of steel it sold.

The government then swung into action, revising customs duty on flat steel from 10 per cent to 12.5 per cent, and on long and semi-finished steel from 7.5 per cent to 10 per cent. Anti dumping duty was imposed for five years on hot-rolled flat products of stainless steel from China, Korea and Malaysia. A safeguard duty of 20 per cent was imposed last September, which was then extended till March 2017. And finally, this February, it stipulated the minimum price at which various grades of steel can be imported into India.

Narendra Singh Tomar, Former Union Minister for Steel

 "I cannot say the sector is stress free right now, but for sure domestic companies have a lot more scope for optimism now," says former steel minister Narendra Singh Tomar, who relinquished office on July 5. "We are on the way to restoring normalcy in the sector."


 

"I cannot say the sector is stress-free right now but for sure domestic companies have lot more scope for optimism now. We are on the way to restoring normalcy in the sector"

The ministry's measures moderated the rate of growth of imports at 20.3 per cent by the end of FY2015/16. Also, domestic steel prices rose nearly 15 per cent to Rs 29,500 per tonne in March compared to January, boosting profits of steel companies and cutting losses (see charts).

What helped was the continued rising consumption of steel in India - 4.5 per cent in FY16 and 3.1 per cent in FY15 - largely led by uptick in construction activity that leads to growth in demand for long products, and a buoyant automobiles and consumer durables sector that consume flat products. While higher sale of long products benefits all manufacturers, companies like Tata Steel, Essar and Bhushan Steel benefit more from demand in auto grade steel that also commands higher margins. Tata Steel, for example, attributed its higher earnings in Q4 of FY16 to growth in sales of its auto grade steel, which hit an all-time high for the company at 379,000 tonnes in the quarter. Similarly, Essar Steel said its ramp-up of production in March led to its operating margin improving from 5 per cent to 20 per cent in the quarter ended March 31. The company's production of flat steel products grew 48 per cent to 1.22 million tonnes during the quarter.

Fortune Favours the Brave

An element of luck kicked in when global steel prices rose 40 per cent in April, after China announced it would provide stimulus to its economy by spending more and raising its projections for fiscal deficit. But that rally was short-lived and steel prices have declined since.

"When China shipped a record amount of steel products in September (2015), the Indian government imposed a series of measures to protect domestic producers. In April, China's shipments cooled to their lowest in 13 months," says Yi Zhu, a Bloomberg analyst tracking the sector. "These may continue to give support to domestic producers."

As in any other industry, some companies fared better than others, but there is consensus the tide is turning. "After MIP, we have seen some moderation in imports, though not to the extent that we would have desired," says Seshagiri Rao, Joint Managing Director and Group CFO at JSW Steel. "Between January and March, prices of steel went up by 15 per cent but the impact on our bottom line was only 2 per cent. The full impact will only be visible from the first quarter (ended June 30) onwards. We expect imports to halve from 12 million tonnes to around six million tonnes this year."

Domestic steel prices have risen by another 10 per cent since March, while imports have declined in each of the past three months. In April and May, 29 per cent less steel reached the ports of India compared to last year. In June, the price of a tonne of hot-rolled coil in Mumbai had risen to Rs 30,853, up nearly 20 per cent over January and 10 per cent over March, albeit it is still 17 per cent lower than in November 2014. "The full impact of the MIP on the domestic realisation due to reduced imports would only be seen in first quarter of this financial year," says Ajay Dhaka, Senior Manager at Care Ratings. "It is expected that most steel players would report improvement in operational performance."

Given the volatility in steel prices and the uncertainty around China, a lot will depend on whether MIP stays in force beyond its August 8 deadline. And that is something people beyond Indian shores are also keeping tabs on.

The WTO Tangle

In 2015, 41 new anti-dumping investigations were triggered targeting steel imports around the world compared to just 23 in 2012 and 2013. Clearly, India is not alone in trying to protect its own industry, but it remains particularly vulnerable.

The main problem afflicting the global steel industry today is overcapacity, led by China, which accounts for nearly 50 per cent of worldwide production. An estimated 400 million tonnes per annum - a third of its production - is surplus. With around 12 million people employed in the sector, China is in no hurry to idle its blast furnaces, though it has promised to reduce its production capacity by 150 million tonnes by the end of this decade. While that itself may not be enough, at least in the interim surplus steel being produced is allegedly being 'dumped' in countries in need of the commodity.

Sanak Mishra, Secretary General, Indian Steel Association

"India is the only big market where consumption is growing and per capita steel use is so low. So our market will remain vulnerable to cheap imports not just in the short term but also a long-term span of 50 years"


India tops that list as the only country among major markets to post a growth in 2016 so far. At a time when countries are scrambling to cut production and manage inventories to minimise losses, India has become the obvious target destination to park some of that excess production. China alone accounts for 28 per cent of all steel imported into the country. In FY15, imports from the country jumped a mind boggling 232 per cent. Japan and Korea, with whom India has free trade agreements, account for another 48 per cent, and clocked growth of 19 per cent and 46 per cent, respectively, in FY15. Not surprisingly, India's protectionist measures have not gone down well with them.


Japan has placed this issue on top of its list of priorities in 2016 and it is likely to crop up during meetings between the two governments when Prime Minister Narendra Modi visits the country later this year. On April 15, Japan voiced its concerns regarding the February 5 MIP and claimed it was inconsistent with the General Agreement on Tariffs and Trade (GATT) of the World Trade Organization (WTO). It was joined by other countries including Chinese Taipei, Canada, Australia, the EU and Korea. Though India defended its position, the pressure is telling. At a review meeting on the MIP between the secretaries of commerce, steel and finance ministries in mid-May, WTO compatible counter-vailing duty and quantitative restrictions - instead of the blanket MIP - were being discussed.

"After WTO's Uruguay round in 2009 where trade remedial action was allowed, 28 per cent of all such actions around the world between 2009 and 2014 was MIP or similar in nature. It is not that India alone has done it," says Rao of JSW. "There could be arguments that it is not compliant but we are confident it is, and we would be able to defend it."

The problem may turn out to be more than temporary in nature. India's steel consumption grew by a robust 4.5 per cent and the government's focus on infrastructure development would ensure further growth in future. At under 61 kg per capita, India's steel consumption is one of the lowest in the world and a far cry from that of Korea, Japan, the US or China.

"It will take us a long time to even get where the world average is. India is the only market where consumption is growing and per capita steel use is so low," says Sanak Mishra, Secretary General, Indian Steel Association. "So our market will remain vulnerable to cheap imports not just in the short term, but a long-term span of 50 years. Our policies need to take this into account."

These fears may be a bit exaggerated. Even at 11.2 mt, imports accounted for less than 14 per cent of India's overall steel consumption in 2015/16. Yet, the pace at which imports grew between 2014 and 2015 means Mishra's concerns may not be totally unfounded.

What Next? Speed Bumps Ahead

If China sneezes, the industry catches a cold, goes a popular saying in the industry. On the evidence of the past two years, China is in intensive care unit and the global industry on ventilator. As the third largest steel producing and consuming nation in the world, that puts India in a precarious situation as well. In a globalised economy, any measure that seeks to insulate a domestic industry from the world is looked down upon and seen as old-world economics. Yet, the challenges of overcapacity, countries unwilling or unable to align supply with demand, and dumping of commodities at artificially low prices in other markets, are also real.

What complicates the situation further in the near term is that the fortunes of the domestic steel industry are closely linked to those of the wobbly domestic banking sector. Steel companies owe as much as Rs 3,00,000 crore to banks and other financial institutions, and over Rs 50,000 crore of that is already under restructuring. If the steel industry does not make money, it will only exacerbate the problems of the bankers.

This August, the government has a decision to make. Being seen as a liberal economy has its perks, but it comes at a price, too.

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