The steel and cement sectors are pinning hopes on a government push for more affordable housing and road spends to boost domestic consumption. The capacities in both cement and steel are under-utilised.

The domestic steel industry is expecting tougher times ahead after a brief, but relatively comfortable run for the past two years. According to analysts, domestic steel consumption grew at 7.5 per cent in 2018-19, down from 7.9 per cent in 2017-18.

The demand growth is from user industries such as infrastructure and construction, railways, and consumer durables during the year. According to ICRA Ltd the muted growth of steel consumption in 2018-19 is due to liquidity and fuel price-related headwinds faced by the auto sector during the second half of the financial year.

 

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Infra & construction

The auto sector consumes just eight per cent of domestic steel consumption as per a 2018 World Steel Association-Indian Steel Association analysis. With 62 per cent consumption, the larger chunk of steel demand comes from the infrastructure and construction sectors, including projects in real estate and roads.

From a current consumption of 98 million tonnes, CARE Ratings estimates India’s steel consumption to grow by 5-6 per cent on the back of government’s expenditure towards infrastructure and construction. These are segments where much work is being anticipated as affordable housing and road connectivity programmes expect an impetus from the government.

The demand estimate for cement is also in line with this anticipation. The incremental demand from proposed ‘Housing for All’ scheme and construction activities of metro or Irrigation projects are likely to aid utilisation and profitability of the cement industry in the long-term. “We further believe that incremental demand will be higher than incremental supply over the next three years, which is expected to aid pricing sustainability. However, with washout demand scenario in the first quarter of financial year 2019-20 so far, pick-up in government spending would be crucial to support growth,” Reliance Securities said in a recent comment on the cement sector.

Till date the Centre has planned 81 lakh houses at an investment of ₹4.83 lakh crore under the Pradhan Mantri Awas Yojana — Urban. Out of these, around 48 lakh houses are at various stages of construction. About 26 lakh houses have been completed and handed over. The mission targets for providing housing for all by 2022 is way ahead of the timelines and targets, according to estimates by the Ministry of Housing & Urban Affairs. Projects worth another ₹1.33 lakh crore have been tendered under the Smart Cities Mission.

In anticipation of a demand uptick from infrastructure sector, steel production has increased by 19.9 per cent in May 2019 over May 2018 levels. This is the 12th consecutive month that steel production has reported an increase as per the Index of Eight Core Industries compiled by the Ministry of Commerce.

The key sector

The road sector is the next key sector expected to drive demand. In Uttar Pradesh alone, the Ministry of Roads has planned National Highways projects worth ₹1.10 lakh crore. The Roads Ministry had set a target of construction of 61,000 km road length by providing connectivity to 19,725 habitations during the financial year 2018-2019. Now the goal post has been shifted to PMGSY-II, a programme to better the quality of these roads, widen them, and provide civic amenities.

The domestic steel industry, however, fears that this higher demand may not be met by them. These concerns are on the back of steel exports to the US from China, Japan and South Korea falling after the imposition of the duty barriers by the Donald Trump administration. During the same period, exports from the three countries to India grew substantially, according to data compiled by the Ministry of Steel. To allay fears, the domestic industry representatives have sought a 25 per cent anticipatory safeguard duty to protect their market when the demand for steel picks up in a few months.

But despite the alleged dumping till now, steel companies continued to make profits. This is because there were lower input costs on account of domestic high grade domestic iron ore prices being on a decline since September/October according to data compiled by the Centre for Monitoring Indian Economy (CMIE). Mining activity being stepped up is also pushing down ore prices. With some iron ore mines licences expiring in the coming year, miners are expected to ramp up production and build inventories, CARE Ratings said.

The Centre has been maintaining that the auction of mining leases expiring in March 2020 will be conducted well before time. But the domestic mining companies are sceptical. “It takes two years to operationalise any mine which is won after an auction. This is largely on account of regulatory and compliance needs. The states have also clarified that Forest Clearances will have to be taken afresh even if an existing mining lease is transferred. This may lead to a situation where there will be a sudden shortage of iron-ore in the country if the process is not sped up,” a mining industry official said.

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