Lack of credit, government expenditure cut has lead to slowdown, says JSW Steel’s Seshagiri Rao

It has been one of the worst year for the debt-laden steel sector. Leading steel companies are caught unaware amid large capex spend and demand falling to a new low. BusinessLine spoke Seshagiri Rao, Joint Managing Director, JSW Steel, on the outlook for coming year. Excerpts:

What is the outlook for the steel sector in the coming year?

We think things have bottomed out. We started the year with 8.8 per cent growth the previous year. The first quarter steel demand growth was 6.4 per cent, then it was 2.4 per cent and then in September it went into negative territory. In October it became marginally positive and improved there on. The cumulative growth in first eight months of this fiscal was 3.56 per cent.

The slowdown in growth was quite visible in the later part of the year from June. The main reason for the slowdown was the lack of credit from banking system and cut in government expenditure. The Government has taken a series of measures to address the issue. Now, credit growth touched 6.5 per cent. Banks’ balance sheet will get strengthened by recovery in big NPA accounts and they will be in a position to lend. The recovery momentum will catch pace. We expect the March quarter to be better than December quarter.

Do you expect a revival in the manufacturing sector?

Today, capacity utilisation is low in the manufacturing sector. At least this should see an improvement if the demand picks up. Today, credit growth from March has tapered off. Credit to the steel sector, in particular, has been coming down quarter after quarter, because of the bankers’ past experience in lending to this sector. They have become risk averse when we want 160 million tonne of capacity in India.

I think some policy calibration is required on lending in general, and specifically to the steel sector for both working capital and long term finance.

How will the steel prices be in the new year?

China is the main driver of steel prices. The Chinese Iron and Steel Association has recently said in the first 11 months of this year, Chinese steel companies operating profit has come down by 34 per cent. This means, at the current prices it is difficult for the Chinese steel companies to make money. The development has led to huge supply-side adjustment.

Steel production globally was 163 million tonne in May. Of this, Chinese companies have produced 89 mt. After this, the steel industry has suffered due to high raw material prices and a fall in demand and steel prices. In November, global steel production had fallen to 147 mt and that of Chinese was 80 mt. So about 15 mt of production cut, and on annualised basis, the supply was lower by 180 mt.

The drastic adjustment on supply-side means that it is not easy for many companies to make money at the current level.