In the $900 billion global steel industry which, like any other commodity industry, is prone to sharp upturns and downturns, the Indian market has forever been a bright spot. In the last 10 years, India's crude steel production has grown 6.2 per cent a year on average, the fastest among the big steel producing nations and more than double the world average of 2.37 per cent. In absolute terms, the rise has been from 57.8 million tonnes in 2008 to over 100 million tonnes last year. It has overtaken countries such as Russia and the US and is on the verge of surpassing Japan as the second-largest steel producer, next only to China. Among the big nations, it is the only country that has reported an increase in production in each of the last 10 years. The trend is likely to continue. "We foresee demand for finished steel products at 92.1 MT in 2018, up 5.7 per cent from the predicted 2017 figure of 87.1 MT. This is the second-highest growth in the top ten steel using countries after Turkey," says Edwin Basson, Director General, World Steel Association.
"India produced 53.5 MT crude steel in 2007 and 101.4 MT in 2017, an 89.5 per cent increase. Japan, the second-largest producer, has seen much more modest increases over the last decade and was the only country in the top ten to see a decline in production last year. If current trends continue, India is likely to become the second-largest steel producing country in the near future."
Globally, the meteoric rise of China has always dwarfed the India story. At the turn of the century, China produced 128.5 million tonnes steel, 15 per cent of the world's total production then. In 2017, it produced 831.7 million tonnes, over 49 per cent of world total.
India's growth has been more sedate but unlike China, which grappled with a glut and where consumption seems to have peaked, there is a consensus that the demand growth will keep rising. One reason is the government's focus on creating infrastructure; the outlay in Budget 2018/19 was increased 20 per cent to `6 lakh crore. Two, India's per capita steel consumption is a mere 63 kg against the world average of 208 kg.
"Most countries are struggling to create demand for steel. In India, there is no such issue," says Bhaskar Chatterjee, Secretary General of the Indian Steel Alliance (ISA). "Production and consumption have consistently grown. We are susceptible to movement in steel prices, which are determined globally but affect the financial health of our industry, but demand has never been a problem. That way, the other markets envy us."
That is not to say the industry does not have problems. The biggest is the poor record of commissioning large greenfield projects such as Korean steelmaker Posco's aborted project in Odisha and ArcelorMittal's failed twin projects (Odisha and Karnataka). These were by far the largest FDI proposals India had ever received. This puts a question mark over the feasibility of targets in the new steel policy, which envisages tripling of capacity to 300 million tonnes with total investment of `10 lakh crore by 2030.
"The challenge would be setting up large greenfield projects," says Anjani K. Agrawal, Global Steel Leader at EY. "For production to rise to 300 MTPA, India may need additional players. New capacity of 200 MTPA will need $180 -200 billion investment; at 30 per cent equity, we need $60 billion. Given the strained margins and volatility, it would be a struggle for current players to generate that much free cash flow. If current EBITDA margins continue, they will be able to fund own capacity expansion, most of it brownfield. But India will still need new entrants."
There could be other speed breakers too. Though the Indian steel industry largely caters to the growing demands of the domestic economy (exports are just a minuscule part of the production), it is not entirely insulated from what happens elsewhere. Till a little over a year back, almost all steel makers in India were in dire straits. Surplus capacity in China led to a crash in global steel prices in 2014 and India became the dumping ground for a desperate China looking for markets to park its excess production at throwaway prices. The surge in imports, which peaked at 11.71 million tonnes in 2015/16, meant companies that were highly leveraged and the less fit struggled to pay off loans. The result - gross non-performing assets, or NPAs, from the sector amount to `1.15 lakh crore; steel is a big contributor to the NPA crisis that banks are grappling with today. Four of the 12 big companies - Essar Steel, Electrosteel Steels, Monnet Ispat and Bhushan Steel - put under insolvency by the Reserve Bank of India are steel makers. "The entire global steel industry was under pressure due to oversupply. It would be unfair to single out India," says Chatterjee of ISA. The NPA mess has a silver lining, though. The bidding process under the Insolvency and Bankruptcy Code is likely to lead to consolidation among existing players and entry of new players. Tata Steel's likely takeover of Bhushan Steel and JSW's acquisition of Monnet Ispat are cases in point. "The industry is in a boom but it has come after a very long and painful time. Nobody wants to take anything for granted," says Chatterjee.
Not everything is hunky dory, though. While the demand-supply mismatch is significantly reduced - capacity utilisation has improved and prices have rebounded - the sector is on the verge of an impending trade war due to rise in protectionism globally. Last month, the Donald Trump administration imposed a 25 per cent tariff on steel imports in a bid to encourage the domestic industry and create jobs. The US is the world's biggest steel importing country. Every year, nearly 35 million tonnes steel reaches US shores from various parts of the world. India does not export much steel to the US (0.7 million tonnes in 2017) and hence is not majorly impacted directly. But there will be an indirect effect. The higher tariff is expected to impact at least 50 per cent of the 35 million tonnes that the US imports, which will become surplus capacity globally and revive the threat of dumping. The fast growth in consumption will make India an attractive dumping ground again. "The countries currently exporting to the US (primarily from Europe and East Asia) will be forced to look at other markets like Africa, Middle East, India, etc, to sell their surplus, even at low prices. If global prices decline, it will affect prices in India too," says Niladri Bhattacharjee - Partner, Strategy & Operations, Mining & Metals, KPMG in India. "India does have protection in the form of Anti-Dumping Duties, CVD, etc, but that is not as good a shield due to the beneficial impact of rising steel prices worldwide. Price reversal is bound to affect realisations. As per a HSBC Global Research report, a 1 per cent drop in steel prices could lead to a 2-10 per cent contraction in steelmakers' EBITDA estimates."
A protracted trade war, with other countries also announcing protectionist measures, will complicate things further. "The bigger risk is industry-wide effect if other countries retaliate with own tariffs, which will affect exports or result in a decline in prices. Any significant downturn in steel demand or prices is a risk to be watched for," says Bhattacharjee. "Trump's tariffs are here to stay. How other countries react will determine how prices behave."
It can undermine India's ambition to become a hub for low-cost steel. Till 2015/16, it exported 4.07 million tonnes, less than 5 per cent of what it produced. But as imports have slid, exports have risen sharply in absolute terms in the last couple of years. In April-January 2018, steel exports rose 40.2 per cent to 8.2 million tonnes. India has been a net exporter this fiscal year. The national steel policy also envisages export of at least 10 per cent steel produced in the country.
An increased play in exports will increase India's vulnerability to volatility in the global market. While the government can protect domestic producers from imports, in export markets, they are on their own. A fall in global prices will affect export margins.
Further, Indian steelmakers have to be mindful of any unprecedented surge in prices of raw materials such as iron ore and coking coal. India imports almost 80 per cent of its requirement of coking coal. While the two big steel companies, SAIL and Tata Steel, have significant captive iron ore and coking coal resources, the recent government decision to auction mines means their cost of operations will also rise, if not today then from 2030 onwards. Iron ore and coking coal together account for 35 per cent cost of steel; a rise will play havoc with the profitability of the industry. India also produces relatively low volumes of high-end value-added steel where an increase in production cost can be easily passed on to end users.
"We have our own challenges to deal with. Our cost of operations is going to rise as some players lose captive mines. Our logistics and cost of capital are anyways high compared to global standards," says Agrawal of EY. "The US will continue to import as their domestic capacity can go up only by so much. So, there will be need for at least 20-25 mt imports. If India has an efficient steel industry, we will be among the last men standing."