Steel, metal firms announce Rs 1.4 lakh-cr capex as fundamentals improve

Two-thirds of these investments are from JSW Steel, Tata Steel and Bhushan Steel

Indian metals companies have started reviving their capacity expansion plans again as they see demand recovering and since prices have remained elevated despite a recent fall. In FY17, metal and steel companies announced capital expenditure (capex) plans worth Rs 1.4 lakh crore ($22.2 billion), according to CMIE data, which is quite a large sum when compared to the past few years.

Mahesh Vyas, managing director & CEO, Centre for Monitoring Indian Economy, said, "There was a smart pick-up in new steel investment in 2016-17. JSW Steel announced a new steel project and Tata Steel and Bhushan Steel have large expansions. The total new investment envisaged in projects announced in 2016-17 at Rs 1.4 lakh crore is much larger than in recent years."

Two-thirds of these investments are from the top three steel companies — JSW Steel (Odisha), TATA Steel (Kalinganagar) and Bhushan Steel (Meramandali). The other two big announcements among the top five investments are from Nalco and Adani in Aluminium and Copper, respectively. Of the total 59 projects, for which CMIE data is available, around half of the projects are in steel and its products, while the rest are in other metals.

Four projects are from the Vedanta Group, of which two are from Hindustan Zinc Ltd (HZL).

In a statement regarding its FY18 investment, HZL said, "The capex on the on-going mine expansion projects, fumer and smelter de-bottlenecking will be around $350-360 million in FY 2018."

According to the CLSA report, the capex is expected to reach $4.7 billion in FY18 and further to $8 billion in FY20.  CLSA didn't respond to an email query.

In general, the steel industry is upbeat since it has seen a recovery in export apart from increasing capex use. The World Steel Association projected that in FY17, steel demand globally increased 1.3 per cent, or 23 million tonnes. Of these, incremental demand growth of 25 per cent was met by India. The government has fixed a target of 300 million tonnes in steel production by 2030. India's total installed steel capacity till FY17 was 128 million tonnes. JSW, for its part, has planned to raise its capacity from 18 million tonnes to 40 million by 2030.

The Vedanta Group is expected to give details regarding the amount that they would be spending for expansion going forward, except in the case of HZL, in the coming few weeks. Vedanta Ltd Chairman Anil Agarwal recently tweeted, "India will need 300 million tons production by 2030 and we see potential for 5 million new jobs by iron ore and steel producing and downstream industries (sic)." He also favours investment in India's own iron ore sector to support upcoming steel capacities. His group company HZL has announced an expansion in steel and zinc smelter, while Vedanta has announced the expansion of copper smelter and iron spun pipe manufacturing.

The metal and steel sector's capex nose-dived post FY14 due to falling commodity prices and highly leveraged company balance sheets. However, according to the CLSA report, "Improving sector fundamentals and cash flows are helping several companies regain confidence. Non-ferrous companies have already firmed up growth plans and we believe that steel capex should also start soon. We believe companies will be more ROCE-conscious in this new round of capex. We expect aggregate annual sector capex to rise from about $4.7 billion in FY18 to some $8 billion by FY20."

The sector's aggregate capex averaged about Rs 62,500 crore ($9.6 billion) annually over FY10-14 as companies invested in large expansion projects taking a bet on commodity prices staying strong and hoping to gain access to captive resources.

Vibhav Kapoor, group chief investment officer, IL&FS, said, "Optimism for metals sector to revive capex has come from the fact that global growth is reviving including in Europe, US, China etc."

However, will expansion bring profit for companies? CLSA says: "Several companies are now focusing on high-ROCE projects. Non-ferrous companies like Hindalco, Vedanta, and Nalco, which have seen meaningful improvements in their balance sheets, have already firmed up their growth plans. We believe that steel capex should also start soon. The sharp rise in capex would impact free cash flow generation in the sector to some extent, but, on the other hand, the start of this capex will improve the growth outlook for the sector and select companies beyond the near term."