STEELY RE­VIVAL

Higher prices and ro­bust do­mes­tic de­mand turn the In­dian steel story around from gloom to boom.

India Business Journal - - CONTENTS - IBJ RE­SEARCH BUREAU

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.

Chang­ing for­tune

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

Buoy­ant de­mand

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.

Hur­dles ahead

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.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.