Meet the Expert. ‘Too much support weakens steel’

Steel prices are likely to remain in a tight range globally, says Nikunj Turakhia, President of the Steel Users Federation of India (SUFI). The Indian steel industry does not need excessive protectionism but needs to be made more efficient and globally competitive, he says. Excerpts from a chat:

How is the supply in India and globally? What capacity additions are coming up?

The global steel situation is one of oversupply. Capacities are stagnant or declining — US capacity reduced from 88 million tonnes (mt) in 2014 to 78 mt in 2015. Japan and South Korea also showed a declining trend. However, as per WSA, production increased 5 per cent y-o-y in April and stands at 142.1 mt.

India plans to add about 180 million tonnes of capacity by 2030 with the goal of achieving 300 mt by 2030. As of now, there is no real movement seen in this regard but it should gather steam in 1-2 years. JSW has got the go-ahead for setting up 10 mt steel project at Paradip.

Do you think China’s role will diminish as production is reduced due to environmental concerns?

China will always remain a big player. The production capacity is about 900 mt. This is substantial and is nearly half of the world capacity.

I agree with the point made by an analyst during a recent SBB conference in Mumbai that until steel mills in China make a profit they will not shut down. The capacities which will ultimately shut down or become non-viable are those in Europe, the US and countries where cost of overheads remains high.

What are the demand drivers in India and globally and how is your outlook?

There is no demand from real estate. The major demand driver is infrastructure, driven by government projects. These are announced and cleared, but implementation seems to be slow.

India has a challenge of building infrastructure, as we saw in China. The intent and initiation has happened, implementation needs to be the focus.

Globally, demand is coming from African and Asian countries. Europe and the US have reached saturation.

Where do you expect prices to head?

Prices are very much expected to remain in the tight range of $400-450 free on board (FOB) basis for hot rolled coils. The raw material prices are expected to be range-bound but on the softer side. Hence, prices will depend on demand, which is not expected to be very strong. In my opinion, prices will be more on the softer side.

What may be the impact of GST on the steel sector?

GST on steel is rate neutral. The real impact of GST is on SME and MSME sectors as the compliance part is very complex and exhaustive. How many in this sector can sustain such statutory compliance is a big question.

The biggest hurdle is of input tax credit not being allowed if seller defaults and only 60 per cent of CGST allowed for non-excisable purchase. In my opinion, the government should have introduced certain compliances in steps so that trade and industry becomes accustomed to the same. However, in the long run, GST is beneficial to trade and industry. The biggest benefit is that now trade and manufacturers are on “at par” level.

The steel trade will move towards more organised from unorganised. The costs are expected to go down as logistics cost will go down; input credit allowed on services for trade is also a big plus.

What regulatory support will help Indian steel industry?

Excessive protection is not in the interest of the steel industry as it makes it complacent. Steps must be taken to make the sector more efficient and globally competitive. One, steel quality control order can be amended to exempt well-known, international standards such as JIS, ASTM and EN from its purview. Two, set the pricing mechanism in the domestic market in line with international market or at the export price of domestic mills for a certain product.

Three, regularise raw material supply to steel mills. Four, address the high debt situation of steel mills immediately by restructuring but combining it with performance. Five, make transportation by railways more efficient.

What are your views on the medium-term growth prospects and profitability of the Indian steel sector?

The Indian steel industry must maintain 8 per cent growth rate to achieve the target of 300 mt by 2030. In the medium term, the steel sector is expected to grow between 5 and 8 per cent, depending on how GST and “Make in India” pans out. The industry currently has robust margins. For example, Tata Steel’s standalone EBITA is at 27.9 per cent while JSW Steel is at 19 per cent for 2016-17. But the secondary steel sector is reeling under tremendous operational pressures.

The flat steel secondary producers have issues of getting raw material such as hot rolled coils at the right price and time. The long products secondary segment is largely dependent on scrap imports and Indian prices are not in sync with the movement of scrap in global market. They are hit badly and high energy costs compound their woes.

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