US tariff to pull down steelmakers’ margins

Indian steelmakers could face a significant effect after US President Donald Trump imposed duties on steel imports to his country. Earlier, it was expected the effect would be minimal, as the Indian steel industry does not have major exposure to the US market. However, the US tariffs, coupled with retaliatory moves by the European Union (EU) and China, have the potential to hurt nascent recovery in the domestic steel industry by making it expensive for steelmakers to export their surplus.

Any decline in exports is likely to exert downward pressure on domestic steel prices. India’s steel demand has failed to keep up with the fast-growing domestic production. Consequently, firms have to ramp up exports. But, they will face competition from firms in South Korea, China, Japan, and the EU, which will scramble to capture new markets.

In 2016-17, the top five Indian steelmakers — Tata Steel, JSW Steel, SAIL, Bhushan Steel, and Jindal Steel and Power — had exported ~229 billion of steel, a jump of 269 per cent over ~62 billion in 2015-16.

JSW Steel topped the list in 2016-17, with exports worth ~101.5 billion — a fifth of its net sales (~523 billion). Its exports were up 276 per cent over the previous year, against 42 per cent year-on-year standalone growth in net sales. Bhushan Steel was second, exporting nearly a quarter of its output.

“In a commodity industry, a small change in supply and demand can lead to big swings in prices. Steel prices in the domestic market could come under pressure if metal supply rises,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Low growth in domestic demand for steel is also adding to woes of the industry.

According to data from the joint plant committee (JPC) of the steel ministry, total finished steel production was up 11.9 per cent, year on year, in 2016-17 and consumption grew 3.1 per cent. Imports were down 38.3 per cent, year on year.

World Steel Association (WSA) says crude steel production in India grew at a compounded annual rate of 5.1 per cent in past three years. The annualised growth in steel demand during the period was 3.4 per cent. As a result, steel production exceeded demand by about 5.8 million tonnes during 2017, up from 3.8 million tonnes a year ago.

The surplus in the domestic market is likely to grow over the next 12 months as struggling firms, such as Essar Steel, Bhushan Steel and Monnet Ispat are acquired by new owners under insolvency provisions. The new owners would want to increase capacity utilisation. “Many of the units are working at 40-50 per cent capacity,” said C Verma, former chairman of SAIL.

According to estimates, the resolution of these cases will bring in 10-12 million tonnes of additional production, worsening the supply-demand situation. This will, in turn, exert downward pressure on prices and these firms’ margins. “There could be some financial headwind in the near- to mid-term if the demand growth fails to rise,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

Verma expects demand to grow 7-8 per cent per annum over the next few years. “If this happens, there will be little surplus capacity left in India. This is not a tall order, given the recent trend in economic growth.”

In 2017, 935 million tonnes of steel were traded globally, according to the WSA. This was equivalent to 57.4 per cent of global production in 2016. Most large steel-exporting economies are also big importers. The EU, the world’s largest steel exporter, is also the world’s top buyer, with its import volumes equivalent to 87 per cent of its steel production in 2016.