Covid-19 crisis: Test for steel industry as domestic demand shrinks

Shrinking domestic demand offers the industry the chance to become globally competitive

Steel is one industry that has high potential to generate exportable surpluses, because of rich local endowments of iron ore and non-coking coal required in sponge iron-making and scope for significant enhancement of domestic ferrous scrap supply once a favourable scrappage policy is in place. In fact, the 2017 national steel policy (NSP) acknowledges the country’s “potential to export sufficient quantities of steel to become a major player in the global market.”

The NSP recommends a three-pronged approach to make Indian steel globally competitive: Align techno-economic performance of the industry with global best practices; encourage our steelmakers to have strategic alliances with global industry leaders to make “more complex, high technology steels” for which we remain import dependent; and seize export opportunities in a competitive way give a push to port lead development of steel clusters.

All the steel-related ambitions encapsulated in NSP were thought to be achievable by the public and private sector constituents of the industry till the Covid-19 pandemic forced the government to declare a comprehensive national lockdown starting March 25. But steel being a continuous process industry like power and aluminium smelting was exempted from the forced shutdown. But what is the point in producing steel if demand is missing from the user sectors which had to down shutters due to the lockdown. Till the government allowed automobile manufacturing and construction work to begin, in the latter case with workers in situ, in the third week of April, steelmakers suffered the disadvantage of totally dried up local demand. No wonder, the industry cut its production of crude steel in April by 65.2 per cent to 3.1 million tonnes (MT) on a year-on-year basis. India’s March production was down 13.9 per cent to 8.7 mt.

Tata Steel managing director and CEO TV Narendran says: “In the beginning of the lockdown, our capacity use was 30 to 40 per cent at some sites. Now we are around 60 to 70 per cent. We are seeing improvement in local steel demand and capacity use as the weeks go by. With relaxation of lockdown restrictions, more and more steel customers are getting permissions to run their facilities. We hope to be able to operate at almost full production levels by the second quarter of 2020-21.” In normal times, industry exports used to be around 10 per cent of production. But in April, the local demand hit such a low that Tata Steel, according to Narendran, was exporting up to 90 per cent of production.

The scene is mercifully changing with steady improvement in domestic demand. Confirming this Narendran says: “The current domestic market having improved since April, our sales within the country are now up to 40 per cent of production on capacity use of 60 to 70 per cent. Come second quarter starting July, production will rise further. But we may continue to export more than we normally do because the local demand for steel will not have picked up that much. As a result, exports will continue to be about 30 to 40 per cent of what we will be making compared to 15 per cent that we (Tata Steel) normally do.” Indian present steel exports are destined to China, the Middle East, Southeast Asia and to a small extent to Europe.

 

In times preceding Covid-19 outbreak, an unending concern of steelmakers here was how aggressive an exporter China would be and how much metal it would leave here. That fear is not unfounded. China is the world’s only major producer which in the first four months of 2020 managed to lift steel production by 1.3 per cent to 319.46 mt, defying Covid-19 impediments. In the same period, world production was, however, down 4.1 per cent to 581 mt. Narendran says: “Much to our relief, China is not found as an aggressive exporter now. In fact, it is now an importer and that is helping us.” China ceasing to be an aggressive exporter “brings some stability to the international market,” which of late has seen hot rolled coils prices going up by $45 a tonne after these fell by about $100 a tonne during February-March. Hopes of pent up domestic steel demand getting released in steps with rise in economic activities and welcome change in Chinese stance on global steel trade make Narendran hopeful that the “next financial year will be good for steel companies.”

Steel secretary Binoy Kumar finds exports when domestic demand is low providing “a good cushion to the industry.” Since becoming steel minister in May 2019, Dharmendra Pradhan has been campaigning for improvement of cost competitiveness of Indian steel and at the same time raise the share of high value bearing steels in the industry product basket. This, he thinks, will help India to become a net exporter of steel on a sustainable basis. What Pradhan is doing is in furtherance of the NSP pronouncement that the Indian industry’s global presence will have to go beyond “base grades... to high quality steels.”

From Indian Steel Association to Crisil, all have forecast major falls in steel demand this year with the caveat that extended vulnerability will further cull use of the metal. In fact, as Covid-19 pandemic has not spared any sector of the economy many national and global agencies have forecast a 5 to 7 per cent contraction in the country’s gross domestic product in 2020-21. In the context of such major disturbances, the question automatically arises whether the NSP target of 300 million tonne capacity build-up by 2030-31 will suffer a setback. Binoy Kumar says: “What is happening due to Covid-19 is a short-term phenomenon. But the 300 million tonne steel target is essentially a long-term objective, to be realised in a planned way over time as per the NSP.”

Narendran says how much incremental capacity and production will occur by 2030-31 will depend largely on the government “spending enough” on infrastructure building. A major assumption of NSP is that a major part of steel consumption will be on account of infrastructure development. “I think the intent is there since even as the Covid-19 is playing out, the government remains committed to building infrastructure. And if that commitment is sustained, at least a part of the journey captured in NSP will be realised.” But one is not too sure of steel demand generation in other sectors, including automobile where Covid-19 is leaving big damages. Their revival is not to happen too soon. Remember, new steel capacity will be created only if demand grows,” says Narendran. 
 

Badly worsted by Covid-19, the immediate priority of the steel industry is deleveraging and cash conservation. Steelmakers will wait for better times to pursue expansion programmes that for the time being are consigned to cold storage.