Steely show, but tough times ahead

Suresh P Iyengar Mumbai | Updated on January 12, 2018

Heavy toll: The slowdown in real estate post-demonetisation has curbed demand for long steel products used in construction and infrastructure projects (file photo)

Much hinges on how well user industries emerge from demonetisation impact

The unstinting support of the Centre to protect the interest of domestic steel firms from large-scale imports, by imposing protectionist measures, will go down as the major highlight of 2016.

The government has imposed a safeguard duty and implemented minimum import price on over 200 steel items despite stiff opposition from exporting countries such as China, Korea, Russia and Japan.

The sharp surge in imports amidst weak domestic demand made many large steel companies run for cover and tested the survival of even the best, till the government slapped the safeguard duty. In February it was followed up with the levy of minimum import price ranging between $341 and $752 per tonne, on 173 steel products for six months.

The list of items covered was pruned to 66 for a period of two months from August. Later, it was extended on 19 products with a price range of $643-752 per tonne till February 4.

The Centre also toyed with bringing in long-lasting protection for the steel industry by imposing stiff anti-dumping duties.

WTO worries

However, it was worried about being dragged to the WTO (World Trade Organisation) by exporting countries if it went ahead with such a levy without proper investigation.

The Directorate General of Anti-Dumping & Allied Duties is already investigating imports of each steel product to justify anti-dumping duties, in case there is a dispute. In fact, Japan recently moved the WTO against India for levying minimum import prices on iron and steel products. India has clarified that the import duty is temporary and will be removed in due course.

Once the government decided to curb shipments, steel imports slowed down. India steel imports were down 39 per cent at 4.7 million tonnes in the first eight months of this fiscal. The country imported 11.7 million tonnes last fiscal.

Languishing demand

Even as cheap imports increased steadily, steel demand in India languished in low single digit numbers in most part of last year. In the first eight months of this fiscal the demand was up just 3.1 per cent. However, domestic steel makers have increased volumes by 12 per cent y-o-y by substituting imports and higher exports.

The low domestic demand amidst rising imports had hurt the highly leveraged steel sector.

The stress in the steel industry is reflected in the banking sector’s bad loan pile. As of June, banks’ loan exposure to the iron and steel sector was ₹2.80 lakh crore. Of this, about ₹1.24 lakh crore or roughly 45 per cent has been classified as non-performing assets.

The fall in demand has not deterred steel companies from completing the planned capacity addition. JSW added 5 million tonnes to enhance its capacity to 18 million tonnes while Tata Steel increased capacity in India by 3 million tonnes to 13 million tonnes.

TV Narendran, Managing Director, Tata Steel, said the company would remember 2016 for the successful commissioning of the Kalinganagar steel plant. The plant made record production of 1 million tonnes of hot metal within six months of commissioning, he added.

“Tata Steel is in discussion with foreign companies for investments in heavy industries over the next five years at the Special Economic Zone project at Gopalpur in Odisha. However, the domestic steel industry faces the challenges of global overcapacity, significantly high coking coal prices and infrastructure bottlenecks in the coming year,” he said.

The demonetisation of high value currency notes in November came as a bolt from the blue, hitting not only the steel producers but also the user industry.

The demand got suppressed just when it was showing signs of revival. The slowdown in real estate post-demonetisation has curbed demand for long products used in construction and infrastructure projects.

Raw material prices

Interestingly, prices of raw materials, especially that of coking coal, have been rising since October.

The international contract price for coking coal more than doubled to $200 a tonne in the December quarter compared to the same period last year.

The spot coking coal price has increased to $309 a tonne from $213 a tonne logged in October. The rise in coking coal prices is expected to push domestic steel companies cost by about ₹5,750 a tonne in the March quarter and wipe out the benefit of trade protection measures against cheap imports.

Going ahead, it is going to be a challenging time for the steel industry, with the impact of demonetisation taking a toll on key demand drivers such as real estate, white goods and automobile sectors.

However, hopes of demand revival are looming, with the payout of the 7th Pay Commission arrears to Central government employees and a good monsoon boosting demand for housing and construction activities. Much, of course, depends on how well they come out of the demonetisation impact.

Published on January 03, 2017

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