STEEL INDUSTRY REELS FROM POOR DEMAND, THIN MARGINS

Steel output has contracted for two consecutive months, after at least four years of continuous expansion. The first of a five-part series finds out what’s ailing the sector

Steel output has contracted in two consecutive months, after at least four years of continuous expansion. The first of a five-part series finds out what’s ailing the sector.

Until each department made a commitment to how exactly it would contribute towards cutting costs by ~3,500 a tonne at a meeting of Steel Authority of India’s (SAIL’S) IISCO Steel Plant last month, no one was allowed to leave the room. The meeting started at 5 pm and lasted till midnight.

That’s the measure of how serious IISCO CEO A V Kamlaker is about slashing costs. Next month’s target for the plant in Asansol in West Bengal is ~1,500 a tonne.

In a sluggish market, cutting costs is the only way to maintain margins. Net sales realisation has fallen by ~10,000 a tonne over the past year, said Kamlakar. In the last quarter alone, it’s dipped by ~4,000-5,000 a tonne.

Steel is one of the most important raw materials for infrastructure and the auto sector. In August and September this year, steel production contracted for two consecutive months (1.5 per cent in both), rarely seen before. On the contrary, the index of industrial production (IIP) for basic metals, of which steel is only a part, rose 9.2 per cent.

The drop is showing on IISCO’S financial performance. In the quarter ended September, it recorded a pretax loss of ~194.9 crore and in the June quarter ~60.5 crore.

IISCO caters mostly to the construction and infrastructure sector which has been adversely affected by the slowdown during the monsoon, a decline in government spending, and liquidity issues.

A small part of the plant’s wire rod coils are used by auto component manufacturers and the weak demand in this sector hasn’t helped.

Typically, about 60 per cent of steel end-use mix is accounted for by construction while 8-10 per cent of demand comes from automobile segments.

In a large integrated steel plant, there are very few variables that can be tweaked to cut costs — except raw material.

"Raw material is the only variable. Even if we can adjust our coke rate by a kilogram, it would translate into savings of crores of rupees," said an official on the shop floor.

IISCO’S furnace can produce 7,800 tonnes a day at full capacity. In September, production stood at 6,000 tonnes and in October it stood 6,700 tonnes. In November, however, production to full capacity was restored.

IISCO has 6,700 regular employees and 6,000 on contract. "Just because production is throttled doesn't mean we have idle people," said Kamlakar. “There is no impact on manpower.”

Around 85 per cent of the domestic steel industry's coking coal requirements is met through imports. The average price for the January-october period of this year has been $186 per tonne — down 9 per cent from $204 per tonne during same period in 2018, said CRISIL Research. The price of the other major input, iron ore, has remained high.

Everyone is resorting to the same measures

With a weak domestic market, IISCO focused on exports. Its story is not an isolated one. Diverting material to the export market to clear inventory, slowing production, and advancing planned shutdowns have been the dominant themes running through small and large, public and private sector steel companies for the past nine months or so.

According to data, finished steel consumption grew only 3.1 per cent in the second quarter of the financial year (year-on-year), compared to 10.3 per cent in the second quarter of Q2FY19.

ICRA Group Head, Corporate Sector Ratings, Jayanta Roy, pointed out the consequences of weak demand. "The slowdown in demand and price levels have led to a significant weakening of financial performance of four large steel players — Tata Steel, JSW, JSPL and SAIL. While the operating profitability declined to around 18 per cent from 23 per cent in FY19, interest coverage deteriorated to 3x from around 4.3x over the same period. The financial performance of smaller companies has been even weaker," said Roy.

Clearly, the country’s economic slowdown is all-pervasive and its ripple effect on people is being felt in different ways. Consider this: the variable pay of executives in a major private sector steel producer is around 25 to 50 per cent. Sixty per cent of that relates to companylinked parameters, EBIDTA being one.

"The company-linked part of the variable pay is likely to be majorly impacted. We have to factor it in while planning our spend," said a company executive.

The lumpsum payout is mostly used to make big-ticket purchases or pay off home loans — and there lies a potential chink in the India consumption story.

Ancillary units also feel the pinch The domino effect of the slowdown on the smaller ancillary units linked to the major steel plants can be seen in the figures. Two units of gearbox manufacturers in the industrial belt of Howrah, about 15km from the central business district of Kolkata, shut shop. Companies they supplied to either resorted to cheaper Chinese alternatives or sourced them locally. Lost: 300 jobs.

The gearbox units are just two of the 100 units that have shut in Howrah in the last two to three years, post-demonetisation and post-gst for which the cost of compliance for smaller units has been high. The slowdown in demand was the final nail in the coffin.

"The e-way bill is making it difficult for some people to send material to other states. Hence they are relocating their units to Uttar Pradesh, Punjab, Haryana, or are just incurring losses and going to NCLT," said Santosh Kumar Upadhyay, general secretary, Howrah Chamber of Commerce & Industry.

Sanjay Budhia, managing director, Patton, who has a steel tubes and pipes unit, said 70-75 per cent of the business which is export-focused is not affected by the slowdown but the remainder has taken a knock because of the slump in the auto sector.

Refractory makers, used mainly in lining for furnaces and kilns, are also suffering volume and pricing pressure.

"There has been a clear slowdown in the last 6-9 months. Production of steel plants is at the same level as last year. Some are producing more and some significantly less,” said Sameer Nagpal, head, advocacy, Indian Refractory Makers’ Association.

A refractory maker supplying to steel plants said: "We are working on wafer-thin margins. Customers are making late payments but there is no relaxation of payment, it's a breakdown of structure."

While there are some signs of a price recovery owing to major steel producers increasing prices, the question on everyone's mind is whether this is sustainable. "We need a demand recovery, not price recovery," said the owner of a small ancillary unit.