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Back on Growth Path

After a prolonged downturn, India's steel industry is set for good times. But it may have to expand quickly to meet the expected spike in demand

An aerial view of ArcelorMittal Nippon steel plant An aerial view of ArcelorMittal Nippon steel plant

The corridors of the Ministry of Steel at New Delhi's Udyog Bhawan are buzzing once again. After a prolonged slump, investors are lining up to exploit the sector's vast untapped potential.

The biggest statement of intent was made by South Korean Ambassador to India Shin Bongkil on April 20 at a virtual roundtable conference organised by the Indian Chamber of Commerce. Bongkil said South Korean steel giant POSCO was again looking at setting up an integrated steel plant in Odisha at an investment of $12 billion, which would make it the country's biggest FDI project.

While Posco is yet to officially confirm it, Bongkil's statement comes barely four years after the company scrapped plans to set up a similar steel plant in Odisha that it had been chasing since 2005. Frustrated by the slow progress and a global downturn in the commodity cycle, which necessitated conservation of resources, POSCO had even surrendered 1,880 acre of land it had got from the government in 2017. Plans for smaller steel plants in Karnataka and Jharkhand were also junked.

At that time, it was seen as a big blow to India's attractiveness as an investment destination. Today, it would act as a shot in the arm for an economy already struggling with low private sector investment and one that is trying to revive itself from the ravages of the pandemic.

Over the last decade, India has made steady progress as a steel producer, expanding its output from 58 million tonnes (MT) in 2008 to 110 MT, growing at double the pace of the world. In the process, it has overtaken Russia, the US and Japan to become the second-largest steel-producing nation after China. Yet, it is still far from exploring its true potential.

India has one of the lowest per capita steel consumption at just 74.3 kg, compared to China's 633 kg, the US' 297 kg, Japan's 498 kg and Germany's 418 kg. Keeping this in mind, the government has set a target of achieving 300 MT of capacity by 2030/31, more than double the current 142 MT. Given that it takes a minimum four-five years for any steel plant to be set up from scratch, the investment cycle needs to start now if the target has to be achieved.

"Increasing demand and price in the global market is giving the Indian industry the required fillip," says Dilip Oommen, CEO, ArcelorMittal Nippon Steel (AMNS) India. "As India develops into a stronger economy, steel consumption is bound to rise. From that perspective, the industry remains very attractive. We expect the current trends of steel demand to continue in the medium term. Definitely, 2021 looks firmer than expected in terms of demand."

Bull Run In A Pandemic

Other factors have also turned favourable for the industry in India. Since the lockdown last summer when global commodity prices suffered a meltdown, the rebound has been nothing short of spectacular. Led by a commodity hungry China, the world's largest producer and consumer of steel, global prices have almost tripled from last May. In India, too, prices have surged. According to commodity market intelligence website Steelmint, prices of hot rolled coil (HRC) in India are currently at an all-time high of Rs 66,600 per tonne as on May 12. In May last year, it was at just Rs 37,200 per tonne and had dropped below Rs 36,000 the following month.

At the same time, demand has also been unusually strong - a win-win for companies. The industry had initially feared a steep double-digit decline in production as well as consumption in FY21, but thanks to a strong rebound in the second half, it was able to contain the fall in overall consumption to just 6.7 per cent and production loss to 7 per cent. The forecast for this year is very positive.

"India suffered severely from an extended period of severe lockdown, which brought most industrial and construction activities to a standstill. However, the economy has been recovering strongly since August, much sharper than expected, with the resumption of government projects and pent-up consumption demand," global industry body World Steel Association said in its short-term outlook last month. "India's steel demand is expected to rebound by 19.8 per cent to exceed the 2019 level in 2021. The growth-oriented government agenda will drive it."

Sky high prices are, however, bad news for user industries, including infrastructure, automobiles and consumer durable, especially at a time when demand is uncertain due to the second wave of Covid. During the downturn of 2016/17 when steel was being widely dumped in India by China, the government had taken a slew of measures, including raising import duties and clamping safeguard and anti-dumping duties on a number of steel grades, to protect the domestic industry. In Budget 2021, Finance Minister Nirmala Sitharaman rolled back some of these measures to help bring down prices.

Customs duty on iron and steel melting scrap, including stainless steel scrap, for example, has been removed entirely till March 2022, while on primary/semi-finished products of non-alloy steel and on long products of non-alloy, stainless and alloy steel, it has been reduced to 7.5 per cent from 10 per cent. Some of the trade remedial measures imposed between 2016 and 2019 that have also been revoked include anti-dumping duty till September 30, 2021 on straight length bars and rods of alloy steel, originating or exported from China, high-speed steel of non-cobalt grade, originating or exported from Brazil, China and Germany, and flat-rolled product of steel, plated or coated with alloy of aluminium or zinc, originating or exported from China, Vietnam and Korea.

Similarly, countervailing duty has been revoked till September on certain hot- and cold-rolled stainless steel products from China and provisional countervailing duty has been revoked for the same period on import of flat products of stainless steel from Indonesia. As part of a sunset review of anti-dumping duty on cold-rolled flat products of stainless steel of width 600-1,250 mm and above, 1,250 mm of non-bonafide usage originating or exported from China, South Korea, European Union, South Africa, Taiwan, Thailand and the US has also been discontinued.

However, at a time when prices of steel in the international market are still significantly higher than in India, these measures have not had the desired effect. According to Steelmint data, prices of HRC in China hit a new all-time high of $1,010 this month, 14 per cent more than the prevalent rate in India.

"While this upward cycle in steel prices brings relief to domestic steel companies grappling with low demand and stagnant prices, it has spooked end-user sectors, who are worried about a steep increase in their raw material costs," Care Ratings said in a recent report. "Besides, increase in steel prices also raises fear of inflation in the domestic markets as raw material cost for many sectors goes up, putting a cascading effect on consumers."

"High steel prices have put the forging industry at risk, particularly when we are still struggling from Covid-inflicted business losses and resultant pressure on cash flows and cash reserves," says Vikas Bajaj, President, Association of Indian Forging Industry. "Rising demand for steel and low production in the domestic market due to increased exports are the prime reasons for price hikes."

Will The Growth Sustain?

There are no signs of the bull run halting anytime soon. Experts predict strong growth for much of this decade as India eventually shrugs off the effects of the pandemic and renews its march towards a $5-trillion economy by 2030. It would mean an average GDP growth of over 6 per cent, which would translate into a substantial growth in demand for steel. So much so that demand may outstrip supply.

"There will be a non-linear demand generation of steel, which will outstrip supply from domestic manufacturers," says Saurabh Bhatnagar, Partner and National Leader, Metals and Mining at EY. "The pace of demand generation will stay ahead of the pace of capacity creation."

"India needs to start investing in capacity augmentation, else we will have to import 80 million tonnes of steel by 2025, which can go up to 150 million tonnes by 2030," warns V.R Sharma, Managing Director, Jindal Steel and Power (JSPL). "A number of projects started in the last decade are yet to be commissioned. They need to go onstream as soon as possible if we have to avoid a demand-supply mismatch."

Also, most companies in India had put off their expansion plans last year. Now that the rebound has shown itself to be stronger than expected, the challenge is for companies to accelerate expansion while trying to make up for that lost year.

"The pandemic and the subsequent lockdown forced many steel players to defer their capex plans in 2020. At least 8-10 million tonnes of capacities that were expected to be commissioned in FY21 got pushed ahead. To meet the vision (National Steel Policy), an additional capacity of 25-30 mt would be required by 2024/25," says Rashmi Rawat, Deputy Manager, Industry Research, Care Ratings.

Some of the projects that were already underway would go onstream to provide some support. These include JSW's 5-MT Dolvi greenfield expansion and NMDC's 3-MT steel plant at Nagarnar in Chhattisgarh. In addition, Tata Steel has also started construction for expanding its Kalinganagar unit in Odisha to add 5-MT capacity by 2024, while AMNS India plans to ramp up finished steel producing capacity to 8.5 million tonnes per annum (MTPA) by the end of 2024. "As one of the most attractive emerging markets with among the lowest per-capita consumption segments, India is making accelerated investments, primarily driven by government spending. GDP growth of 6-7 per cent in the medium term augurs well for the industry," says Oommen.

The medium-term expansion plan for companies that has been designed in line with the National Steel Policy is also aggressive. JSW Steel plans to expand its capacity in India to 45 MT, while Steel Authority of India Ltd (SAIL) is looking to more than double its capacity to 50 MTPA by 2030. Similarly, JSPL is looking at a capacity of 27 MTPA by 2030, which includes expanding its Angul unit to 12 MTPA.

AMNS India is planning to ultimately expand the capacity of its Hazira unit to 18 MTPA, at an estimated investment of Rs 50,000 crore. It has also signed an MoU with the Odisha government to set up a 12-MTPA integrated steel complex, the feasibility study for which is underway. "Steel demand is estimated to grow at 7 per cent per annum in the medium term domestically. Hence, there is a need to grow capacity at a similar rate," says Oommen.

In addition to these are projects, including Posco's tie-up with state-run Rashtriya Ispat Nigam Ltd for its steel unit in Vizag, and Essar Steel coming back into the fray to develop a 3-MTPA steel plant in Kadapa for the Andhra Pradesh government. And if Bongkil's pronouncement fructifies, it will be the cherry on the cake.

Exports, The New Market

While the domestic market remains the mainstay, another avenue that has opened up for the Indian industry is exports. As the country went into a lockdown in April last year, steel firms saw a surge in demand overseas. In May 2020, India exported nearly 1.3 MT of steel. The next month, it went up over 1.5 MT. By the end of FY21, the country had shipped a record 11.65 MT of finished steel, a 30 per cent growth compared to FY20.

The reason was once again China, which accounted for nearly 30 per cent of India's exports in the initial months. As the world went into a lockdown to break the chain of the spread of the virus, China was already past the peak and its economy was opening. At the same time, it focussed on shutting down many of its old, polluting steel mills and filled that gap through imports. The trend is likely to continue in FY22 as well.

"We expect exports to remain high in FY22 due to rising global demand for steel and attractive export realisations," says Rawat of Care Ratings. "Domestic steel prices are at a discount to international prices, which would incentivise steel companies to scale up exports."

The withdrawal of China from the global export market also opens up avenues for India in other geographies such as Europe and the US. On April 28, China announced the removal of export rebates on 126 steel products, including hot-rolled coils, and also the reduction of import duty on crude steel, pig iron and scrap-to-zero with effect from May 1. This augurs well for Indian companies.

"Given the strong demand, export rebate cuts, the Chinese government's intent to keep steel capacities under check and stricter production curbs imposed in the Tangshan region (which accounted for about 14 per cent of China's crude steel production in CY2020), China may not have excess steel volumes to divert to export markets," says Jayanta Roy, Senior Vice president and Group Head, Corporate Sector Ratings, ICRA. "As a result, international steel prices are expected to remain buoyant in the near term, which in turn would support Indian prices."

It is not to say that exports will be prioritised over the domestic market, but it does give companies an extra avenue to explore, one that is more lucrative as well. This in turn reinforces the view that India needs to expand its capacities for the medium-to-long term.

"As a principle, we export only after catering to the domestic market. Exports peaked at 60 per cent during the lockdown last year. However, as domestic demand rebounded, the percentage of exports declined drastically to negligible levels in January 2021. We will continue to serve the domestic market before exporting, as MSME customers remain a priority for us," says AMNS India's Oommen.

"Once the Covid crisis in India is over and domestic demand starts picking up, India will re-prioritise domestic supplies over exports. However, given its huge reserves of iron ore and China's focus on eliminating/replacing inefficient and polluting capacities of steel making, India will become a major source of steel in the world. Its share of exports will hence rise proportionately," says Bhatnagar of EY. "Regardless of Covid, steel manufacturers will continue to push outputs of their mills. If they do not find the market within India, they will find a market outside India."

High Debt : Need For Caution

Not everybody, however, wants companies to throw caution to the wind and blindly press ahead with investments. Arnab Hazra, Deputy Director-general of industry body Indian Steel Association, feels companies should not be in a rush to commit to big-ticket investments and be wary of the cyclicity of the sector. "These are very unprecedented times. Most of the rally in global prices is driven by China, which is not under our control. We need to be cautious," he adds.

There is merit in his argument. The last time when the global steel cycle turned in 2015, Indian companies were busy expanding capacities. Excess capacity in China saw it dumping steel in global markets and India was a prime target. As prices crashed and profitability was hit, the industry found itself in a debt trap. By the end of FY16, gross NPAs in the sector amounted to Rs 1.15 lakh crore. It accounted for four of the 12 big firms - Essar Steel, Electrosteel Steels, Monnet Ispat and Bhushan Steel - pushed by the Reserve Bank of India for NPA clean-up under the Insolvency and Bankruptcy Code (IBC).

The IBC-induced wave of consolidation has just gotten over. It saw ArcelorMittal buy Essar Steel, Vedanta take over Electrosteel, Tata Steel lapping up Bhushan Steel, and JSW acquiring Bhushan Power and Steel. At the same time Tata Steel's subsidiary Tata Sponge Iron bought the steel assets of Usha Martin and JSW led a consortium that acquired Monnet Ispat and Energy. The non-performers came at a significant discount, but pushed debt levels of the acquirers. Hazra says the industry must pause a bit and use this opportunity to pare their debt first.

"Whatever expansion plans or projects already committed will, of course, come onstream. But for fresh big-ticket investments it is too early," says Hazra. "Given what happened last time, banks are not eager to lend to the steel industry. The situation on price and profitability is very volatile right now. Companies should chalk out their plans on paper, but wait for at least 12-18 months for the situation to stabilise before committing...It does not matter if the National Steel Policy misses its deadline by a few years. Nobody in 2017 foresaw the pandemic but we do not want a repeat of the crisis of 2016/17," he adds.

What he says is already happening. The debt levels have started to come down with companies advancing their payments. Tata Steel, SAIL, JSPL and others have worked aggressively to bring down their debt in the last few quarters. Tata Steel, for example, has pared its debt by Rs 28,000 crore in FY21 to bring its overall debt down by 28 per cent to Rs 75,389 crore. It repaid Rs 12,000 crore to its lenders in the last quarter alone. SAIL has also reduced its debt by over Rs 16,150 during the fiscal, the highest reduction ever in a year for the state-run firm. Its overall debt has come down to Rs 35,330 crore at the end of FY21, compared to Rs 51,481 crore in FY20.

The most aggressive of the lot has been JSPL, once straddled with debt of nearly Rs 50,000 crore. On May 10, it repaid Rs 2,462 crore to term lenders, over and above the debt repayment target for FY21. It has reduced its debt by Rs 20,000 crore from a peak of Rs 46,500 crore in December 2016. Recently, it had announced divestment of its thermal power business, both to reduce its debt and cut down its carbon footprint by almost half. The estimated size of that divestment was Rs 12,000 crore. "The significant debt reduction is part of our long-term financial strategy to create a strong balance sheet," says JSPL's Sharma. "In the coming quarters, we intend to further strengthen our balance sheet and become net debt-free shortly."

The forecast on prices and margins for the industry remains upbeat for the near term even as costs of inputs such as iron ore have risen, and prices of steel are at the far end of their elasticity. "While the tailwinds to realisations from higher input costs and global prices could abate going forward, domestic demand growth would provide an offset. Consequently, realisation in FY22 may still be 15 per cent higher than the average of the past five years," says Manish Gupta, Senior Director, CRISIL Ratings. "That, along with rising volumes and moderate coking coal prices, would mean healthy operating margins of 23 per cent, against 25 per cent in FY21."

This only means the debt reduction spree will continue. According to CRISIL, the industry collectively reduced its debt by Rs 25,000 crore in FY21 and is set to pare at least another Rs 10,000 crore in FY22. "Despite capex rising by 15 per cent, they can slice debt by another Rs 10,000 crore," says Naveen Vaidyanathan, Associate Director, CRISIL Ratings. "That would drive a sharp improvement in credit metrics with financial leverage (debt-Ebitda ratio) declining below 2.5 times next fiscal, compared to above 4.0 times in FY20."

It may or may not happen immediately, but with balance sheets being strengthened and demand forecast rosy, it is a matter of time before investments in the steel sector kick off in the right earnest. It may herald a return of the private sector investor to the Indian economy at large.

@sumantbanerji