Higher prices and robust domestic demand turn the Indian steel story around from gloom to boom.
Higher prices and robust domestic demand turn the Indian steel story around from gloom to boom.
The worst seems to be over for the Indian steel industry. Big breakthroughs in recent bankruptcy proceedings point to the domestic steel sector in the thick of robust revival. Top, global and Indian steel companies have clinched deals at the National Company Law Tribunal (NCLT) - the designated court for resolution of corporate debt and bankruptcy - to acquire their peers, saddled with huge non-performing assets (NPAs).
In the past few months, successful bankruptcy proceedings have seen debt- battered Electrosteel, Bhushan Steel and Monnet Ispat and Energy getting a new lease of life as well as new promoters. While Tata Steel acquired Bhushan Steel, and Vedanta Resources bought Electrosteel, Monnet Ispat was lapped up by JSW Steel. Meanwhile, a bitter, two-way battle has been raging on at the NCLT for control over Essar Steel - the country's fourth- largest steel company - between ArcelorMittal - the world's largest steel manufacturer - and Russia's NuMetal. Similarly, the UK's Liberty House, Tata Steel and JSW Steel are locked in a close fight to acquire debt-distressed Bhushan Power & Steel.
The around Rs 7,00,000-crore steel industry has unfortunately been the largest contributor to Indian banks' overall bad loans. In fact, the NPAs of the five steel companies - Bhushan Steel, Bhushan Power and Steel, Essar Steel, Monnet Ispat and Energy and
“2018 is going to be a landmark year for the Indian steel industry as consolidation will be helped by resolution of NPAs. This consolidation will lead to better utilisation of capacity, improvement in synergy and economies of scale.”
CHAUDHARY BIRENDER SINGH Union Steel Minister
Electrosteel - at Rs 1,52,973 crore account for a whopping 49 per cent of banks' total exposure of Rs 3,13,000 crore to the entire sector. No wonder then that these five steel-makers were among the first 12 large loan defaulters - the socalled 'dirty dozen' - that were taken to the NCLT on the direction of the Reserve Bank of India (RBI) in June last year.
The steel sector's NPAs are much more - the exact official figure is not yet out in public domain
- if bad loans of other medium and small steel companies are added up. So, how did the vital sector come to such a sorry state?
In the years preceding the global financial crisis of 2008, Indian steel companies were on a debt-fuelled, corporate- investment spree. They undertook ambitious, overseas acquisitions and made huge capacity expansion, betting on rising demand for the alloy in a fast-growing economy.
But their bets went sour a few years later as their new plants came on stream. China, which had commissioned a huge number of steel plants, began flooding its excess steel across the world. This depressed the price of steel. High cost of iron ore and coking coal as a result of a rising Chinese demand for raw materials, coupled with subdued price of steel, dented Indian steel-makers' balance sheets.
"Steel companies had carried out huge capital expenditure (capex), but when the new capacities came to production, the market had entered a lowprice cycle. As a result, companies struggled to service the loan taken for the capex," notes Jayanta Roy, a senior vice-president and group head (corporate sector ratings) of ICRA.
The tide appears to be turning in favour of Indian steel companies in the past one year. And the clearest sign of the good times ahead can be seen in the aggressive bids for stressed steel assets at the NCLT. Bad loans of three, big, steel companies have been resolved, with haircuts, of course. The two other steel-makers are in advanced stages of getting rid of their NPAs. Resolution of the big-five NPAs will not only free up more than Rs 1,50,000 crore of blocked funds but also put these companies' 21.8 million tonnes (mt) of steel production capacity to profitable use.
In a matter of a few months, the steel industry seems to be shedding its image of the biggest generator of bad loans. The recent mega deals at the NCLT reflect a wave of positive developments sweeping across the global steel industry. Global steel production grew by a little over 5 per cent at 1,691 mt in 2017 and was evenly matched by high consumption of 1,622 mt. The problem of plenty, which was the bane of the industry a few years ago, has disappeared and helped in pushing up the price of steel.
China, the world's largest producer of the alloy with 831 mt of output in 2017, has been eliminating its additional steel-making capacity on environmental concerns. The Asian nation, which manufactured half of the total global steel production in 2017, phased out 115 mt of capacity in the past two years. China aims at slashing another 150 mt of capacity by 2020. Simultaneously, Chinese domestic consumption has been on the upswing, leading to a 21 per cent fall in its exports last year. Prices of steel have rebounded as a result and benefited steel- makers across the world. "The global demand has improved in the last two years after China decided to clamp down its production back to 5 mt a month due to environmental concerns," opines Tata Steel MD and CEO T V Narendran.
The spike in prices has helped
many Indian steel companies to turn profitable in the past two years. Tata Steel, one of the country's oldest steel companies and third-largest by capacity, and JSW Steel, India's second-largest steel-maker, have been posting profits in the past two years. In fact, FY18 was a remarkable year for both the steel manufacturers, enabling them to register record output and net profit during the period.
Steel Authority of India (SAIL) - the country's largest steel company - and Rashtriya Ispat Nigam (RINL), also known as Vizag Steel, could also make the most of the last financial year. Though the two State-owned steel producers were still in the red in FY18, they were able to pare their losses considerably - SAIL cut its FY18 net loss by nearly six-fold, while RINL's net loss was lower by nearly 50 per cent.
In a recent report, rating agency ICRA points out that of the 22 large and mid-size steel companies, 14 have improved their operating profits to 25.4 per cent in Q4 of 2017-18, supported by healthy volume growth rate and large price hikes effected during the quarter. These companies had reported operating profit of 18.4 per cent in Q3 of 2017-18 and 15.7 per cent in Q4 of 2016-17.
The rating agency expects further improvement in the operating profit margins of the industry in the current financial year on the back of a healthy demand, successive increase in prices and lower cost of raw materials. Incidentally, production of iron ore, a vital raw material for making steel, crossed the 200-mt mark to touch 210 mt in FY18. The higher iron ore output was facilitated by an increase in production in Odisha and Karnataka. This was also the first time that ore production crossed the 200-mt thresh- old - a feat achieved in 2010-11 at the height of a mineral boom - since the crackdown on illegal mining throughout the country.
The high output brought down the average price of the benchmark, 62per-cent-grade iron ore to $70 per tonne in the first half of 2018. Analysts predict that slowing Chinese economy and fears of global trade war escalating will further push the average price of the benchmark iron ore down to $61 per tonne in the JulyDecember 2018 period. The lower price of the vital raw material is set to raise profit margins of steel-makers further.
The changed dynamics of the global steel industry has brought renewed energy and enthusiasm among Indian steel-makers. In March this year, India churned out 104.98 mt of steel and dislodged Japan to become the world's second-largest producer of the alloy. With global prices ruling high and with Chinese exports down, India stepped up its shipments and also became the world's second-largest exporter of steel by once again replacing Japan from that position. In fact, Indian steel exports grew by around 17 per cent to 9.621 mt in 201718 as against 8.242 mt in the previous financial year.
"In FY17 itself, India became a net exporter of steel with significant export of 8.2 mt, registering 102 per cent growth over the previous financial year's figures. In a time span of four years, the country's steel exports have risen from 5.6 mt in FY15 to 9.6 mt in FY18," stresses Union Steel Secretary Aruna Sharma.
India, in fact, has been a net exporter of steel for the past 13 months. Besides, its steel imports have also fallen from a high of 11.7 mt in FY16 to 7.5 mt in FY18. The last year's import numbers are, however, slightly on a higher side as rising protectionism in developed countries is leading to steel getting diverted to countries, like India, where demand for the alloy is growing at a fast pace.
“The global demand has improved in the last two years after China decided to clamp down its production back to 5 mt a month due to environmental concerns.”
T V NARENDRAN MD & CEO, Tata Steel
“Going by the current trend of imports in the first quarter of the ongoing financial year, India may see imports hitting around 8.5 mt in FY19, well above the normal range of 6.5-7.5 mt. It is matter of concern.”
SESHAGIRI RAO MD, JSW Steel
A brighter side of the Indian steel story is the rising demand for the alloy back home. The domestic consumption rose by over 7 per cent in 2017-18 to a little over 94 mt, buoyed by a surge in infrastructure development - especially of highways, bridges and metro lines - as well as high growth in sectors like oil and gas and automobile.
"Domestic demand for steel has bounced back over the past year, growing at 7.6 per cent year on year. This growth has been supported by a strong pick-up in infrastructure execution in the past year," points out Noel Vaz, an analyst of IIFL Securities. With the government setting aside Rs 5.97 lakh crore in the Union Budget 201819 for infrastructure, the momentum of demand is likely to sustain with steel production growing at over 5 per cent in the next two years, adds Mr Vaz.
Responding to rising consumption, Indian steel-makers added 7 mt of capacity in 2017 alone, taking the country's production capacity from 110 mt in FY15 to 134 mt in FY18. JSW Steel is investing Rs 7,500 crore until 2020 to ramp up its Vijayanagar facility in Karnataka and its Dolvi plant in
“India is a strategic growth market, and if you look at steel industry growth, then the majority of growth in the coming years is going to come from the developing economies, such as China and India.”
L N MITTAL Chairman, ArcelorMittal
Maharashtra. Jindal Steel & Power (JSPL), which operates the world's largest sponge iron plant of 3 mt in Raigarh, Chhattisgarh, has already added 3.5 mt at its Angul facility in Odisha. Tata Steel, which has finalised a joint venture with Germany's Thyssenkrupp to combine the European steel facilities of both the companies, is raising capacity at its Kalinganagar plant in Odisha from 3 mt to 8 mt in four years.
Amid the buoyant mood and robust growth prospects, the Indian steel industry received a shot in the arm from a government policy last year. The National Steel Policy 2017 has set a very ambitious target of achieving production capacity of 300 mt per year for 2030- 31 from the present 134 mt. The policy is also looking at raising the country's per capita consumption of steel from the 68 kg to 160 kg by FY31. The current global average per capita steel consumption at 220 kg is over three times the present Indian figure.
The government has also been
backing the ambitious targets with pro-industry policy measures. The government has introduced a Minimum Import Duty on certain steel products and an Anti-Dumping Duty on products from China and European countries to protect the domestic steel sector. It has also allowed 100 per cent foreign direct investment (FDI) in the sector under the automatic route.
Meanwhile, the country's steel production is expected to grow in double digits in coming years from around 6 per cent in the past few years. The bullish production numbers are in tune with the global and Indian economic growth projections for the upcoming years. The latest International Monetary Fund (IMF) projection has estimated the global economy to grow at 3.9 per cent in 2018. India too is bouncing back to over 7 per cent Gross Domestic Product ( GDP) growth in coming years.
"India is a strategic growth market, and if you look at steel industry growth, then the majority of growth in the coming years is going to come from the developing economies, such as China and India", notes L N Mittal, the chairman and CEO of ArcelorMittal.
Besides, high growth in major steel-consuming sectors, such as infrastructure, construction, real estate, housing, capital goods and machinery, consumer goods, automobiles and energy, will certainly push up demand for steel in the near future. More- over, the government's ambitious programmes like, Pradhan Mantri Awas Yojana, Smart Cities Mission, Pradhan Mantri Gram Sadak Yojana, Bharatmala and Power For All initiatives, prompt steel-makers to step up production to meet the growing demand for steel.
Meanwhile, further escalation of the ongoing global trade war poses a threat to India's grand 300-mt target. The USA has imposed a 25 per cent tariff on steel and aluminium imports into the country, and countries, like China and the European Union (EU), among others, have retaliated with their own import tariff hikes.
India may not be directly hit by the US' tariff hike, as India's steel imports into the USA make up a mere 2 per cent of the total imports. However, trade and tariff barriers across the world may result in dumping of steel meant to the USA and EU into India. "Duties imposed by the US would trigger trade diversion from other steelmakers, who would then dump their products into India. As much as 80 mt of steel or 17 per cent of global exports could be diverted to markets, such as India," cautions Indian Steel Association Secretary General Bhaskar Chatterjee.
Likely high imports flooding the country again can spell doom for the domestic steel industry. They could push down prices, hurt steel-makers' margins and take the steel industry
“Duties imposed by the US would trigger trade diversion from other steel-makers, who would then dump their products into India. As much as 80 mt of steel could be diverted to markets, such as India.”
BHASKAR CHATTERJEE Secretary General, ISA
back to gloomy times that were prevalent just two years ago. High shipments into India could turn the clock back on the industry and push the country back to being a net importer of steel from its present status of a net exporter.
"The Indian industry has to worry about anything above the normal range of 6.5-7.5 mt of steel imports. Going by the current trend of imports in the first quarter of the ongoing financial year, India may see imports hitting around 8.5 mt in FY19. It is matter of concern," points out JSW Steel MD and Group CFO Seshagiri Rao. The industry and the government must hence be alert and act swiftly with safeguard measures, such as Anti-Dumping Duty.
Global threat apart, there are other hurdles back home that may hamper India's huge production capacity ambition. The issues range from a lack of adequate availability of high-quality coking coal to logistical challenges - such as a lack of proper rail linkages, non-availability of rakes and insufficient berths at ports - that hinder smooth transportation of coal and other minerals from mines and ports to steel plants. Moreover, bureaucratic hurdles and long-winding regulatory and environmental clearances for mines and other mega projects could melt India's steel dreams even before they can materialise.
Although India boasts of vast reserves of iron ore, it lacks availability of the other key ingredient of steelmaking - the coking coal. Domestic supply of coking coal is of poor quality due to a high ash content, which varies from 19 to 21 per cent. So, around 70 per cent of the total coking coal requirement is met from imports from Indonesia, Australia and South Africa. High import prices of coking coal, which are often volatile too, take a toll on steel-makers' margins.
The government and the industry must immediately address the issue of improving domestic coal produc-
tion and enhancing its quality. Moreover, the government should take adequate measures to ensure proper logistical solutions for the industry. A shift from allocation of mines to auctioning them has brought in the muchneeded transparency. There is now the urgent need to bring about ease of doing business to expedite rollout of big projects.
As India looks to set up the 300-mt production capacity, funding the mega project will be a major challenge. Analysts estimate that the project will require an investment of over $150 billion (more than Rs 10,00,000 crore), an astounding figure, considering that the banking sector is stretched with mounting NPAs.
The big successes in the ongoing bankruptcy proceedings of stressed steel companies offer a ray of hope for financing the grand 300-mt target. "2018 is going to be a landmark year for the Indian steel industry as consolidation will be helped by resolution of NPAs. This consolidation will lead to better utilisation of capacity, improvement in synergy and economies of scale," emphasises Union Steel Minister Chaudhary Birender Singh.
The aggressive corporate deals being struck at the NCLT are scripting a new success story of the Indian steel industry. Apart from homegrown entities, like Tata Steel and JSW Steel, leading, global, steel giants - ArcelorMittal, Vedanta and Liberty House - are vying with each other to grab a share of the fast-growing, Indian, steel market. Meanwhile, higher prices and robust, domestic demand have turned the Indian steel story around from gloom to boom.
Resolution of big-five steel NPAs will put these companies’ 21.8 mt capacity to profitable use.
The domestic consumption rose by over 7 per cent in 2017-18 to a little over 94 mt, buoyed by a surge in infrastructure development
Tata Steel and JSW Steel have registered record output and net profit in FY18, thanks to better realisation.
The bane of excess capacity has disappeared and helped in pushing up the price of steel.
National Steel Policy 2017 has set a production capacity target of 300 mt per year for 2030-31.
Amid boom, the industry is facing challenges like availability of highquality coking coal and logistics.