Indian stainless steel Industry: Present tense, future uncertain

Indian stainless steel Industry: Present tense, future uncertain

Indian Stainless-steel industry is just coming out of the COVID-related disruptions and the pent-up demand, signalling a upcycle, are positive signs.

Indian stainless steel Industry: Present tense, future uncertain Indian stainless steel Industry: Present tense, future uncertain

However, the announcements made in the Union Budget 2021-22 regarding the suspension of countervailing duties (CVD) on Chinese imports of stainless-steel flat products, and repeal of the CVD on imports of stainless steel flat products from Indonesia, have created uncertainty, since the adverse impact of the CVD withdrawal is now visible in import surge.

The government’s decision in the Union Budget 2021-22, to suspend the CVD on imports of stainless steel flat products from China, which was in place since September 2017, and the repeal of CVD on imports of stainless steel flat products from Indonesia imposed in October 2020, has derailed the growth prospects of the sector by opening the floodgates of imports from these two countries.

These duties were based on detailed investigations by the Directorate General of Trade Remedies (DGTR), which had proved the prevalence of the non-WTO compliant subsidies in these countries, leading to substantial injury to the domestic Indian industry.

In the first four months of this financial year 2021-22 (April-July of FY 22), since the suspension of the anti-subsidy duty on China and the removal of anti-subsidy duty on Indonesia in the Union Budget 2021-22, there has been a staggering 177% surge in stainless steel imports as compared to last year’s (FY 21) average, and a 159% increase from the 2016-17 average, the base year prior to the imposition of CVD on China.

The imports from Indonesia are driven by a huge stainless-steel capacity of about 5,5 MT set up by Chinese companies targeted mainly at export markets, since the local demand is insignificant.

India is the second fastest-growing market for stainless steel and therefore, the target of large-scale import of stainless-steel flat products.

In the pre-COVID year 2019-20, as much as 24% of the market was captured by imports, half of which came from Indonesia, even as domestic industry capacity utilisation was just 60%.

The majority of the unutilised capacity, being with the MSME sector among the stainless steel producers. It may be mentioned that Indonesian stainless steel has been facing trade cases from around the world, including China, due to dumping and non-WTO compliant subsidies.

So, India provides a ready and open market under India-ASEAN free trade agreement. The final DGTR recommendations on anti-subsidy countervailing duties on Indonesia clearly bring out the subsidies enjoyed by Chinese companies in Indonesia, which gives them unfair advantage in export markets.

It will also inflate the trade deficit that India already faces with the ASEAN block. Some reports suggest that Indonesia may overtake India as the second largest stainless steel producer at this rate.

The fear of both the large and the MSME sector is that, if the current import trend continues, the domestic stainless-steel industry may find it difficult to recover further.

The profitability of stainless-steel units, which is already low, maybe squeezed further, making their businesses unviable.

A comparison of profitability between carbon steel players and those in the stainless steel sector will shed some light on the low profitability of the sector.

The EBITDA to net sales percentage, which is a fair indicator of profitability, varies greatly between the steel and stainless steel sector.

For instance, in FY 2020-2021, this ratio for steel companies, such as Tata Steel, JSPL, JSW, and SAIL, was 34%, 39%, 27% and 18% respectively.

The same for stainless steel companies, such as Salem Steel Plant (measured on PBIT), Shah Alloy, Jindal Stainless (Hisar) Ltd and Jindal Stainless Ltd was -3%, 7%, 12% and 12% respectively.

Even under the present market pickup, the profitability of stainless steel remains half of the carbon steel industry. The MSMEs, which employ more than 400,000 workers directly or indirectly in their more than 500 units and work on even lower margins than the large sector, may face the brunt of the impact, even resulting in closures and lay-offs.

The scenario has created uncertainty and put a question mark on future investments in the sector. Indian stainless steel industry is fully globalised, with major raw materials (like scrap and nickel) being imported.

The price of stainless steel is driven by international raw materials prices and market conditions. However, the price increase in stainless steel has been lower than in many other commodities.

The stainless steel industry, like other commodities, is also cyclic and operates on relatively lower margins as compared to the rest of the steel industry.

Therefore, it is more vulnerable to the vagaries of the marketplace. Despite inherent cost disadvantages like the cost of capital, logistics cost and dependence on imported raw material, ‘Made in India Stainless Steel’ is competitive with respect to many developed economies. However, it cannot compete against unfair trade practices of countries like China and Indonesia.

Indian Stainless Steel Development Association (ISSDA) has been representing to government on various issues in the interest of faster growth, including the CVD issue.

The government has also announced a series of policy measures to accelerate the growth rate like higher infrastructure spending, focus on dairy/fisheries/food processing, modernisation of railways, banking sector reforms, digitisation, and massive vaccination programme.

This is significantly going to boost the economy and lift the market for stainless steel. However, the doubt that has arisen in the minds of the industry is whether this market will be available for domestic industry or captured by Chinese companies? We are looking for an answer, taking cue from the policy perspective and market environment.

Indian Stainless-Steel industry has grown the hard way. Some pioneering companies like SAIL/Salem, JSL, Mukund, Viraj etc. invested in stainless steel when market visibility was hazy.

In fact, a large 1.1 MT plant by JSL was set up at Jajpur in Orrisa, when that kind of market was not visible at all. Stainless Steel industry had confidence in the Indian market and in the sterling properties of the material to expand the industry by market development and creating awareness in the minds of the consumers.

ISSDA also made its humble contribution to the massive efforts and the industry has grown 10 times in the last 20 years. However, it could not factor in the predatory Chinese methods and today stands at crossroad of new growth phase unleashed by the government on one hand and Chinese onslaught on the other.

Therefore, government support at this critical stage is imperative to carry on with the next growth cycle of the stainless-steel industry. There is a need to restore the CVD on China (dated September 7, 2017) and accept the fresh final CVD findings of Indonesia, as recommended by the DGTR on January 15, 2021, and levy anti-subsidy duty on imports from Indonesia, to save an important and niche sector of the economy.

(The author is President, Indian Stainless Steel Development Association (ISSDA).)

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Published on: Nov 03, 2021, 5:38 PM IST
Posted by: Tarab Zaidi, Nov 03, 2021, 5:18 PM IST