Steel industry braces for tense 2016; bets on domestic demand

The over USD 100 billion Indian steel industry is placing bets on rising domestic demand in the new year as it tries to counter predatory pricing and import glut that haunted the sector in 2015.
Amidst subdued demand and the specter of China flooding global markets with cheaper products, analysts predict a tough 2016 for the industry worldwide but expect India to remain more profitable than its Asian peers helped by higher domestic economic growth and rising demand.
The year 2015 was marked by deflation of commodity prices globally bringing down steel prices. In the Indian context, the drop was steeper than that of other raw materials, leading to severe pressure on operating margins of steel plants.

Besides, weak demand in major steel producing countries such as China, Japan and South Korea led them to focus on exports at aggressive prices, including on India, adversely impacting the domestic industry. It led to prices of some products hit a ten-year low in Indian market.
The combination of predatory pricing and import glut have jeopardised billion of dollars in loans raised by the domestic steel companies for capacity expansion, a situation that has a major bearing on the financial health of some of the largest banks in India.
The steel sector is a major contributor to the Non- Performing Assets or bad loan woes of the public sector banks saddled with gross NPAs of around Rs 3 lakh crore.

"Steel industry is tense, not just in India but the world over. But, India has been better placed this year compared to other countries. We increased production as well as demand this year," Steel Minister Narendra Singh Tomar told PTI.

In 2015, India achieved the distinction of being the third largest steel producer globally. Demand during April to November rose by 5.3 per cent and production grew by 2.4 per cent during the same period, he added.
"Experts from the steel sector are saying that industry might remain tense next year as well as in 2017. But, I feel the sector runs according to market situation and I believe we should be able to come out of this situation very soon," he said.

On the much awaited Minimum Import Price (MIP) on certain categories of steel products, Tomar said the government will look after the interest of all the steel producers, both big and small. Government is considering the Minimum Import Price.
"At present imports are hurting the domestic industry. The government is aware of it and it has taken steps to check this," the minister said, adding that it is talking to the Commerce Ministry on this issue.
Global ratings agency Moody's expects profitability of Indian steel firms to be lower in 2016 compared to the previous years, but the country would be better placed than its peers in Asia, where it expects the sector to be hit by weak profitability and oversupply.

Moody's said it expects India's top three steel producers
- state-run SAIL, and private players Tata Steel and JSW Steel - to eat into the market share of small steelmakers.
The three will add production capacity in the next one to two years to capture domestic demand growth, it said.
(EY) India said the performance of steel industry in 2016 is positively correlated to that of automobiles, consumer durables and construction sectors.
"The industry posted a healthy growth rate with the total finished steel production increasing by 4.3 per cent y-o-y to 91.46 MT in 2014-15. In addition, the Indian steel consumption is forecast to grow faster in 2016," EY National Leader Metals and Mining Anjani Kumar Agrawal said.

The success for players is closely linked to government decisions around import/export duties and mining taxes/ royalties as well as environmental and land regulations.
He said the government's focus on 'Make in India' and infrastructure "looks to take off and translate into sustained demand for steel in the next couple of years".
Moody's said China slowdown has led to a surge in imports of steel into India, not only from China, but also from Japan and South Korea. Such imports rose some 42 per cent in the first half of 2015-16 fiscal, with the result that Indian hot rolled coil (HRC) prices fell by 37 per cent.

The Indian government has taken several steps to protect the domestic steel industry, including raising import duties on long and flat products. But duties for steel imports from countries with Free Trade Agreements - such as Japan and South Korea - are much lower at 1 per cent.
Steel giant Tata Steel expects the investments in infrastructure to help in increasing steel demand in 2016.
"Pace of economic growth in India is encouraging for the steel sector. In light of investments in infrastructure building, we can expect increase in demand next year. In fact demand in India, is expected to grow to 87.6 MT in 2016, from 75.9 MT in 2014 and 81.5 MT in 2015," it said.

"India should assess the pros and cons of bilateral and multilateral trade agreements to achieve its stated objectives including strengthening domestic industries," it added.
Another major steel producer Essar Steel too is pinning its hopes on the rise in demand for the metal, particularly in the second half of 2016.
"India is likely to be among the few countries worldwide where steel demand will see an upswing. The demand growth is likely to pick up towards the second half of 2016 as several government sponsored infrastructure projects gather momentum," the firm said.
However commodity market, including iron ore is unlikely to pick up in near future. In addition, Chinese economy is likely to move towards more domestic consumption driven economy, Essar Steel said.

It added that pressure on topline and bottom-line for steel companies due to cheap imports is likely to continue.
Indian steel industry suffers several cost disadvantages of around USD 100 per tonne compared to big steel producers in China like higher finance, logistics and infrastructure cost.
India's largest stainless Steel producer Jindal Stainless (Hisar) Ltd (JSHL) said investments in 2015 were muted and no major green field projects were announced. Most of them were in the brown field expansion category.
"In 2016, much will depend on how import scenario shapes up and how demand grows in concur with infrastructure growth as projected. Yes, the investments in the private sector will be in a very cautiously calculated mode," JSHL CFO Ankur Agrawal said.