Is the Indian steel industry bending in the right direction?

India’s steel capacity and production have grown steadily over the last 9 years, making the country a net exporter of steel. However, with domestic HRC trading at a premium to imports, there is a strong possibility of India turning a net importer of steel again in 2023-24. IBT analyses the sector’s performance over the past 9 years, and takes a holistic view of the long term growth outlook.  

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The Union Minister of Steel Jyotiraditya Scindia recently held a press conference to detail the performance of the steel industry over the past 9 years. He highlighted that India has become the world’s second largest producer of crude steel during this period, surpassing Japan in 2018. Moreover, the country was a net exporter of steel with exports of 6.72 MT of finished steel in 2022-23, vis-a-vis imports of 6.02 MT. It was a net importer in 2014-15.  During 2014-15 to 2022-23, crude steel capacity has grown to 160.3 MT  (up by 46%), while crude steel production has grown to 126.3 MT (42%).

Current performance analysis

The steel industry is a critical driver to economic growth and employment and a key input to several sectors of the economy such as construction, infrastructure, automobiles, engineering, and defence. While the pandemic and global trade scenario slowed the sector for some time, recent developments are restoring it to its former trajectory.

Following the pandemic, the steel industry in India experienced a V-shaped demand recovery, which, coupled with government policy announcements for sectors like rail, road, aviation, gas pipeline, and housing, along with changes in global supply and demand dynamics, led to a resurgence in production and growth during 2021 and 2022.

It is anticipated that India’s finished steel consumption will rise to 230 MT in the fiscal year 2030-31, compared to 133.6 MT in FY ’22. The Indian steel sector has been thriving, rising at a CAGR of 5% to 6% year on year. 

The global steel market reached a value of US$ 874.6 billion in FY22. The market is predicted to reach a value of US$ 1,052.25 billion (IMARC) by 2027, exhibiting a growth rate (CAGR) of 3.02% from 2022-27. World crude steel production reached 1,951 million tons (MT) in FY ’22, showing a growth of 3.6% over CY 2020.

#Steelfact According to the World Steel Association, there are more than 3,500 different classes of steel, each with its own set of physical, chemical, and environmental qualities. Steel is classified into four classes depending on its chemical composition including carbon, alloy, stainless, and tool steel.  

Globally, steel production has witnessed a decline in 2022 by 4%, with the largest producer China showing decline by 2%, Europe declining by 10% YoY and US declining by 5% YoY. However, India and Middle East have bucked the trend with growth rates of 5% and 7% respectively. According to a statement by Edwin Basson, Director-General of World Steel Association, India’s steel industry is better poised due to stronger fundamentals driven by “better domestic demand, increased export opportunities, limited imports, and firming up of steel prices at healthy levels”. He adds that besides the domestic market, India’s steel sector may ramp up its exports sharply to the Middle East and Southeast Asia in the coming years.

Below are the top 5 steel-producing countries in the world — million tons (MT) as of FY22

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Source: Ranking of the World Steel Association in FY22 (in million tons)

India’s exports of steel (HS 72) in value terms, however, have declined sharply by 41.5% to US$ 13.4 billion in 2022-23. Value decline was strong across all top 10 markets with the exception of the US (up by 1.2%). The sharpest declines were seen for China (-69.4%); Vietnam (-59.6%); Belgium (-49.4%); Indonesia (-40.1%) and Turkey (-39.6%). When we look at the market mix compared to 2014-15, US, UAE, Italy, Belgium and Nepal continue to rank amongst the top 10 export markets, while Iran, South Korea, Thailand, Japan and Bangladesh have dropped out of the ranks.

Exports of Articles of Iron & Steel (HS 73), however, have grown by 11% YoY to US$ 9.8 billion in 2022-23, led by the US (US$ 3.1 billion, up by 15.7% YoY); Germany (US$ 474.92 million, up by 2.5% YoY)  and the UAE (US$ 467 million, up by 12% YoY). Compared to 2014-15, US, Germany, UAE, UK, Canada, Saudi Arabia, Netherlands  and Italy have remained among the top 10 markets for India, while France and Iran have dropped out of the ranks (DGCIS data).

Future outlook and challenges

The steel industry in China is currently facing challenges due to a decline in demand and falling steel prices. Initially, there were hopes for a recovery as the Chinese economy reopened, but the momentum of demand has slowed down.

The decrease in Chinese steel exports and an oversupply in the domestic market have resulted in corrections in steel prices, according to an analysis by ICRA. As a result, there is a possibility of increased steel imports in the Indian market. However, there is some relief for the sector as input costs have moderated, which could help cushion the impact of the price corrections.

Due to the waning effect of pent-up demand in China, steel prices have declined at the beginning of FY 2024. Chinese export offers have caused domestic hot rolled coil (HRC) prices to decrease by 3.8% in the current quarter. Similarly, domestic rebar prices have also seen a correction of 4.8% during the same period.

Although there is resilient domestic steel demand, which grew by 7.2% in April 2023, a significant price recovery seems unlikely in the near future due to external challenges. As a result, ICRA has revised its steel price forecasts for the fiscal year 2024, anticipating average domestic HRC prices to be 4-5% lower year-on-year (YoY).

The current adjustments in Chinese hot rolled coil (HRC) export offers have led to domestic HRC prices trading at a premium of US$ 50 per metric ton over Chinese imports. Additionally, Japanese HRC export offers are higher, at US$ 615 per metric ton. This premium over imports opens up the possibility of a potentially significant increase in steel imports by as much as 30-40% YoY in 2023-24. This could make India a net steel importer in FY 2024 after five years of being a net exporter.

To address competitiveness issues vis-a-vis imports, India needs to tackle multiple challenges, including the inconsistent supply of electricity, transportation difficulties, and high transportation costs leading to narrow profit margins. Moreover, the structure of steel supply chains for capital goods creates inherent inefficiencies for Indian manufacturers. When they attempt to establish a hub for capital goods or concentrate on specialty steel, they encounter cost challenges. The advantage of having inexpensive labor is counterbalanced by a scarcity of skilled workers.  These factors make it more challenging for Indian manufacturers to compete effectively in the capital goods sector.

On the upside

Steel producers can find relief from a moderation in input costs in fiscal year 2024. The spot price of seaborne prime hard coking coal, which constitutes around 40% of the overall steelmaking cost and is primarily sourced from Australia, is expected to average 20-25% lower than the levels seen in fiscal year 2023.

Similarly, thermal coal prices have moderated, with domestic e-auction premiums decreasing and imported thermal coal spot prices trading at lower levels. Moreover, a correction in domestic iron ore prices is anticipated, further reducing input costs. These factors contribute to a partial cushioning effect, enabling the industry to maintain operating profit margins at 12-13% in fiscal year 2024, similar to the levels in fiscal year 2023.

On the positive side, the government’s capital expenditure drive and the focus on domestic steel consumption are expected to keep the industry’s capacity utilization rate at around 80% in fiscal year 2024. However, as earnings moderate and expansion plans gain traction, the industry may increasingly rely on external financing. This is evident from the rise in bank borrowings by the steel industry during fiscal year 2023. As a result, the sector’s leverage, measured by total debt to operating profits, is projected to deteriorate to a range of 2.5-3.0 times in fiscal year 2023 estimated/fiscal year 2024 projected. In the international market, a clear window of opportunity for India is the sharp drop in China’s steel production from its peaks in 2016, and an expected closure of 150 MT of production capacity. This is a window that Indian steel makers must leverage proactively in the coming years.

Comments

  1. Good review of the steel scenario. We should be mindful of the European Union’s Carbon Border Adjustment Mechanism, rendering Indian steel, made by coal furnaces vulnerable to being priced out.

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