Strengthening steel

| Updated on July 27, 2021

PLI scheme for specialty steel is well thought-out, should be backed by quick approvals and funding

The Centre’s Production Linked Incentive (PLI) scheme for steel has been a long time coming, but it appears to be both well-timed and well thought-out. Today, India’s leading integrated steel players are in good enough financial shape to dust off their long-pending capex plans. After an extended down-cycle where the sector’s profitability was battered by poor prices, overcapacity and excessive debt, India’s large integrated steel players have emerged stronger this past year after trimming debt and acquiring facilities from weaker players under bankruptcy proceedings. A fortuitous upturn in the global steel cycle and India’s demand holding up despite Covid, have bolstered capacity utilisation for the large players. Ratings agency CRISIL estimates that armed with operating profit margins of 32-33 per cent this fiscal, large players are likely to double their planned capex in the next 3-4 years. The PLI scheme has, therefore, come at the right time.

Rather than hand out blanket subsidies for a commoditised product, the Centre has targeted its PLIs at very specific grades of specialty steel with heavy import dependence. Specialty steel today makes up 4 million tonnes of India’s 6.7 million tonne steel imports and just 8 per cent of domestic steel capacity is dedicated to it. By offering incentives worth just ₹6,322 crore, the Centre hopes to induce capex of ₹40,000 crore and output of ₹2.5-lakh crore. In designing the scheme, the Centre has taken cues from its other PLI experiments. Allowing existing players to avail themselves of PLIs for brownfield capacities is a pragmatic move to get the facilities up and running quickly. So is the flexibility allowed to companies to defer their initial targets by up to two years to deal with project setbacks. Given the poor financials of most secondary steel producers, it is possible that the PLIs will be cornered by a few large integrated players. But this would be not be a bad thing for scale economies and global competitiveness. So, the Centre should look to relax the per-player PLI cap of ₹200 crore per year, should the need arise.

Policymakers do need to bear in mind though that sales-based monetary incentives do not really help investors surmount land acquisition controversies or environmental concerns that have left many a project stillborn. They may need to smooth the road on this score. Banks, having burnt their fingers in this sector, are also likely to be wary of funding new capex at this juncture. To ensure ample funding, the Centre may thus need to expedite its DFI (development financial institution) idea or consider a specialised funding agency for steel on the lines of PFC for power projects. Steel-makers, on their part, need to reduce their import dependence for raw materials and ruthlessly prune costs so that when the PLIs run out, their specialty steel facilities stand on their own feet.

Published on July 27, 2021

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