Steel demand in rural areas hit

Suresh P Iyengar Mumbai | Updated on January 15, 2018


About 50% of the industry is in the unorganised sector, which trade largely in cash

The demonetisation of high-value currency is set to have a deflationary impact on cash-based steel sales, especially long products used in real estate, construction and infrastructure projects.

Of the 80 million tonnes of annual steel produced in India, about 50 per cent is handled by unorganised secondary steel producers who trade largely in cash. This apart, the steel scrap industry which feeds the key raw material for secondary steel producers, rely on cash for most of its transactions.

India has TMT and rebar steel production capacity of 25-30 million tonnes. Of this, large organised steel companies, such as Tata Steel and JSW Steel, produce about nine million tonnes; the rest comes from the secondary steel producers who use steel scrap as raw material.

Lack of adequate liquidity has already caused immense stress in tier-II and tier-III cities forcing some steel mills to temporarily shut down amidst fall in demand. These mills, which have bought raw material in cash transactions, have to now sell their produce through the official channel after paying taxes.

“With the low demand, some of the small steel companies are trying to show finished products stocked with them as long-term inventory and sell them in the official market by paying 30-35 per cent taxes,” said a top official of a steel company .

In fact, he added, the impact of demonetisation of high-value currency can be gauged from the fact that the cash economy in India is among the largest at 12 per cent of GDP while globally it is only about 4 per cent.

Sectors, such as real estate, infrastructure and discretionary spending in bullion, jewellery and luxury goods in rural areas will be hit badly. On the positive side, he said, the huge flow of deposits into banks and lower demand for consumer goods in the rural economy would help banks reduce lending rates.

Goutam Chakraborty, Research Analyst, Emkay Global Financial Services, said the demonetisation impact on the steel industry would be negative in the short term as demand for steel from the cash-driven construction and real estate companies in small towns would come down sharply.

Published on November 14, 2016

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